Game Over in China?

Shares of Perfect World (Nasdaq: PWRD  ) opened 9% lower this morning after the Chinese online gaming company delivered disappointing quarterly results.

Revenue slid 13% to $106.5 million. Given the scalable nature of the business, profitability was essentially cut in half.

Things won't get any easier for Perfect World in the near term. The midpoint of the company's guidance calls for yet another decline both sequentially and on a year-over-year basis.

Rival Shanda Games (Nasdaq: GAME  ) didn't take a hit when it reported mixed results yesterday morning, but it has to be troubling for Shanda to come up short on the top line. Sprinkle in a layer of uncertainty as Shanda's CEO also resigned yesterday.

Shanda isn't the only company that came up short in projected revenue. Two weeks ago, it was market darling NetEase.com (Nasdaq: NTES  ) taking its lumps after its revenue of $308.9 million fell woefully short of Wall Street's target of $333.9 million. Some of the weakness at NetEase can be attributed to stateside partner Activision Blizzard (Nasdaq: ATVI  ) . NetEase is the gaming giant's Chinese distributor for World of Warcraft, and the iconic multiplayer franchise has been shedding subscribers globally for more than a year.

Analysts aren't impressed. They see Perfect World and Shanda Games posting declining revenue for all of 2012. The news gets relatively better for NetEase and Giant Interactive (NYSE: GA  ) . Wall Street sees both companies growing their revenue in the teens this year and again in 2013. However, these are also dot-com trailblazers that were growing a lot faster before.

The valuations are certainly compelling. Shanda, Perfect World, and Giant Interactive are all fetching earnings multiples in the single digits this year. NetEase isn't necessarily expensive, either, fetching less than 12 times this year's projected profitability and 10 times next year's income forecast.

However, the uncertain reports and uninspiring near-term outlooks make it hard to get excited here. Online gaming stocks in China are cheap, but they're going to have to prove that they're worth the investing risk.

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Motley Fool newsletter services have recommended buying shares of NetEase and Activision Blizzard. Motley Fool newsletter services have recommended creating a synthetic long position in Activision Blizzard. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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