Why China Mobile Games & Entertainment Group Ltd. Shares Plunged

Is China Mobile Games' drop meaningful? Or just another movement?

Mar 5, 2014 at 1:10AM

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 China Mobile Games & Entertainment Group Ltd (NASDAQ:CMGE) fell more than 10% during Tuesday's intraday trading, then partially recovered to close down around 8.5% after the company turned in disappointing fourth-quarter results.

So what: Quarterly revenue more than quintupled year over year to $24.2 million, which helped China Mobile Games swing from a $1.7 million net loss this time last year to net income of $5.9 million, or $0.10 per diluted American depositary share. By contrast, analysts were looking for net income of $0.17 per share on sales of $29.64 million. 

Now what: This in mind, China Mobile Games' average revenue per user also fell sharply from $15.05 per user in the same year-ago period to $4.09 in Q4. However, it did represent a notable uptick from ARPU of $4.09 last quarter, which indicates the downward cycle could be waning. 

Still, the stock isn't exactly cheap trading around 15 times last year's sales and 26 times this year's estimated earnings. Keeping in mind those estimates are likely to drop once analysts have time to fully digest today's news, I think investors would be wise to let the dust settle before making any long-term decisions.

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Steve Symington has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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