Novice Investing - Shanda Interactive Looks Attractive

Date: Thursday 20th 2008f November 2008 04:47:18 PM

Shanda Interactive Looks Attractive - 12/6/2005

By: Novice Investing Staff

Shanda Interactive Entertainment Ltd. (SNDA) makes money from massively multiplayer online games. When you play one of the popular online games and compete against other gamers, you are in essence paying Shanda and its competitors. It went public in May 13th of 2004. Quickly, the share took off from its IPO price of about $ 12 to the high of $ 40 in early 2005. As late as August of 2005, you can sell Shanda share at around $ 35 a piece. How times have changed. On Tuesday December 6th 2005, you can buy Shanda at less than half its summer price, at $ 16.17.

What gives? It seems like Shanda is initiating a new model for its business. W.D. Crotty of The Motley Fool reported that Shanda is now adopting a free-to-play service. Previously, Shanda charges fee for gamers to be able to play online. It instead tries to make money from Avatar-based revenue model. By definition, Avatar is 'graphical personification of a computer or a computer process, intended to make the computing or network environment a more friendly place.' In short, Avatar is the image gamers want to portray themselves in the virtual world.

Gamers have been buying and selling Avatar for quite sometime in a website such as eBay. Shanda is trying to exploit this market by giving a free service for gamers to play the game while making money on Avatar. Management stated that in the short term, revenue will be affected. When you are giving away something for free, that is always the case.

The question is whether Shanda can weather this short-term bump and emerge stronger. In our mind, we believe that exploiting Avatar market will benefit the company. While subscription based model is fairly lucrative, there is a lot more potential to be had in the Avatar business. It all depends on the management's execution at this point. Meanwhile, share price has fallen 50 % from its summer price to reflect this shift in business model. How attractive is Shanda at this point?

We only have an outdated data from Yahoo! Finance. But going to the company's website, as of September 30th 2005, Shanda holds a $ 531.9

Million of cash equivalents & long term investments while incurring a $ 275 Million of long term debt. This gives Shanda $ 257 Million of positive net cash or $ 3.61 per share. Meanwhile, earning for the year is expected to hit $ 1.46 per share. With shares of Shanda trading at $ 16.50, the company's business is valued at a P/E ratio of 8.8. Please note that we subtract the positive net cash from share price to find the current value of Shanda's business.

Cheap? Yes. As you know, the fair value of a common stock for a 0 % growth is at a P/E of 13.4 with current interest rate environment. At this point, Shanda may not earn $ 1.46 next year due to the implementation of its new revenue model. However, patient investors who have faith in management, can buy the shares in anticipation of the success in the new revenue model. Online gaming industry is growing worldwide. The trend is for gamers to play online and compete with other gamers. If investors can ride the stock volatility, they may do well in the long run investing in Shanda.

END

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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 Entertainment Ltd. (SNDA) or any other securities.

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