Novice Investing - Shunning Shanda Interactive

Date: Monday 01st 2008f December 2008 05:42:45 PM

Shunning Shanda Interactive - 09/28/2007

By: Hari Wibowo

Shanda Interactive (SNDA) has long been our favorite of a case study for a turnaround stock. We have talked about it since the day Shanda changed its revenue model to free to play, making money on add-on items such as avatars and other games items. On its first quarter with the new business model, Shanda reported $ 0.94 loss for the fourth quarter of 2005. Digging further, the loss was exaggerated by the acquisition of Actoz, a South Korean online gaming company. Exclude that and Shanda experienced a mere 4 cents loss.

That is pretty amazing considering that Shanda just recently changed its business model completely. If one day Nokia decides to give its celullar phone for free and make money on the accessories, I don't think Nokia will report a small loss for its first quarter with the new business model. Perhaps, Nokia may not even turn any profit at all for the first few years! d

Fast forward in 2007, Shanda shares has risen more than 2 folds to $ 37 per share. Earning per share for 2007 is predicted to be $ 1.66 per share which is a far cry from a loss. With improving business condition, is it still prudent to purchase Shanda now? For turnaround investors, the answer is an obvious no. Shanda is doing well now and to reap the great benefit of owning Shanda, the company needs to perform significantly better than now. So, what is the catalyst for this? So far, they are releasing new games but results will not be as profound as the new business model.

Is it time to sell Shanda? Very hard to tell. Since the federal reserve is cutting 50 basis points of federal fund rate, the dollar is expected to weaken and other assets (stocks inclusive) is expected to rebound. In the short term, Shanda may well reach $ 50 per share. However, we are far better off to find other turnaround investment candidates.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Shanda Interactive Ltd.. (SNDA) or any other securities.

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