This Dividend-Paying Gaming Stock Is Destined For Further Gains

With growth expected in both online and mobile games, this gaming company looks set to soar higher.

Apr 1, 2014 at 3:00PM

Chinese gaming company Perfect World (NASDAQ:PWRD) looked like a value play at the end of last year. The company was seeing solid progress in mobile gaming, and was strengthening its online gaming portfolio at the same time. Hence, it is not surprising to see that Perfect World shares are up close to 20% this year, outperforming the likes of Glu Mobile (NASDAQ:GLUU) and NetEase (NASDAQ:NTES).

Although Perfect World is seeing some margin pressure as it makes an aggressive push into mobile, the company's prospects remain strong. This is why Pacific Crest bumped its price target on the stock from $24 to $28, representing almost 40% of upside to Perfect World's current share price of around $20. Given the moves that Perfect World is making to bolster its gaming pipeline and increase its subscriber base, such a price target doesn't look unrealistic.

MMORPG focus
Perfect World has focused on releasing expansion packs and additional content for its exiting titles in a bid to keep gamers engaged. According to Forbes, MMORPG's command higher spending rates by gamers as they are more engaging. Hence, Perfect World's focus on this segment is important for long-term earnings growth. 

Looking ahead, the company is getting ready to launch Dota 2 and Legend of the Condor Heroes. Perfect World is currently initiating the commercialization of Dota 2 and will be launching it in China pretty soon. Meanwhile, Legend of the Condor Heroes, which is a 3D massively multiplayer online game (MMORPG), might also become a key factor in boosting its performance in the fast-growing Chinese gaming market. 

In addition, the introduction of Neverwinter in China will further strengthen Perfect World's portfolio. Perfect World has already seen some success with this title in overseas markets such as North America and Europe, and it seems to be doing the right thing by introducing it to the Chinese audience. Perfect World's track record of growing through its MMORPGs has been good so far, with the likes of Swordsman Online and Saint Seiya Online driving revenue higher in the previous fiscal year. 

Mobile moves
However, Perfect World is aggressively moving into mobile and diversifying its business as MMORPG gaming in China is not growing as fast as it used to. This is why gaming giant NetEase's revenue growth has slowed down. In the last quarter, NetEase's gaming revenue increased just 14%, dropping from 21% in the preceding quarter. As NetEase focused more on its online games, the company's growth took a hit. It is now looking to get back on track with mobile games, but since the competition is intense, rivals such as Perfect World and Glu Mobile can steal a march as they have moved first in this market.

Perfect World's first mobile game, Return of the Condor Heroes, has been received well as it is based on the role-playing game genre. Perfect World took it mobile initiative to the next level this January by releasing a 3D MMORPG mobile game, Fantasy of the Immortals. In 2013, mobile gamers in China increased remarkably to 215 million, an increase of 54% from last year. Hence, Perfect World's foray into this segment is a pretty natural move.

Tough competition
However, Perfect World is still no match for Glu Mobile in mobile gaming. Glu has a solid portfolio of mobile games that include Contract Killer, Frontline Commando, Eternity Warriors, and Deer Hunter. Glu has been in mobile gaming for a long time and the company has utilized its expertise by upgrading its gaming platform to deliver an enhanced experience to gamers.

Glu's GluOn platform provides gamers with a number of interactive features to make gameplay more interesting, and the company is slowly integrating it across its titles. Moreover, Glu is now targeting the next wave of mobile evolution and had released Spellista, a word-puzzle game for the Google Glass last year. Hence, Perfect World still has a long way to go before it reaches the level of Glu Mobile. 

But it cannot be denied that Perfect World is making slow, but sure-footed moves in mobile gaming. After successfully launching two mobile games, Perfect World will soon bring out Forsaken World to expand its mobile portfolio. Thus, the company is focusing on quality rather than quantity as it rolls out its mobile games, giving itself time to promote them and make adjustments in case something goes wrong.

Final words
The good points about Perfect World don't end here. The stock is still quite cheap at under 12 times last year's earnings and also has a dividend yield of 2%. Moreover, its debt is quite low at $34 million and cash position is strong at almost $402 million. Considering that Perfect World's payout ratio is just 24%,the dividend has room to grow once it establishes a solid footing in mobile games, making it an enticing investment opportunity.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends NetEase.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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