Why Changyou.com Shares Plunged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Changyou.com (NASDAQ: CYOU  ) fell more than 20% Monday after the Chinese game developer released weaker-than-expected forward earnings guidance with its third quarter results.

So what: Revenue rose 10% year over year to $183.1 million, which translated to a 6% drop in adjusted net income to $73.2 million, or $1.37 per share. For reference, analysts were looking for adjusted earnings of $1.36 on higher sales of $183.35 million.

In addition, Changyou said it expects fourth quarter revenue to be between $193 million and $199 million, which actually beat average expectations for Q4 revenue of $190.25 million. However, it also said next quarter's adjusted earnings should come in between $0.34 and $0.41 per diluted share, or significantly below expectations of Q4 earnings on the same basis of $1.39 per share.

Now what: So why the lower forward earnings number? According to CFO Alex Ho, in the fourth quarter the company is planning to "significantly ramp up [its] marketing investment to promote [its] lineup of new games, mobile applications, and other Internet products in both China and overseas, so as to further expand [its] user base and aggressively capture the market potential."

Of course, it's hard to blame investors for bidding the stock down, given the significant change in expenses, but don't forget the company could also profit handsomely over the long term if all goes as planned. Still, remember such a concerted ramp in marketing expenses isn't without risk, so I think it's worth approaching shares of Changyou.com with caution for the time being.

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