Why Shares of 500.com Ltd. Were Falling Today

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 500.com  (NYSE: WBAI  ) were down as much as 17% Wednesday on word of legal controversy after the company reported first-quarter earnings this morning.

So what: It was a strong quarter for the Chinese online sports lottery site, as sales jumped 127.3% to $14.4 million, ahead of the $12 million estimate. Earnings per share hit $0.15 against the consensus of $0.08. The company's active user base grew 28% sequentially in the period, but investors were turned off by a report that the China Sports Lottery Administration Center said it had not authorized any sports lottery websites, jeopardizing the company's ability to do business.

Now what: The report added that online sales in China are illegal without prior authorization. 500.com said in a filing that it had received China Sports Lottery Administration Center permission in October 2012 to operate as an online lottery as part of a pilot program. Still, the site could be suspended without further approval from the Ministry of Finance. 500.com has not yet responded to the report, but clearly a suspension would be damaging to its business. You can stay on top of this developing story by adding 500.com to your Watchlist by clicking right here.

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