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 Ltd (BTCM 3.77%) were down 18.8% as of 1:00 p.m. EST Wednesday after the Chinese online sports-lottery company announced the temporary suspension of online purchase orders for lottery products by "certain provincial sports lottery administration centers."
Specifically, 500.com says those administration centers have suspended orders in response to a notice jointly put into effect by the Chinese Ministry of Finance, Ministry of Civil Affairs, and the General Administration of Sports requiring that they do so as part of a self-inspection process and to "take remedial measures for unauthorized online lottery sales within their respective jurisdictions."
So what: 500.com elaborated the suspensions will affect four of its high frequency lottery products, which collectively accounted for around 9.6% of overall revenue last year. It also promised it is closely monitoring the situation and "will disclose relevant information in a timely manner once available."
Now what: Over the long run, 500.com insists this situation will "ensure healthy development of the lottery market in China," and therefore should be good for its business despite the near-term hit.
Most unsettling, however, is that the announcement came just two days after 500.com stock plunged more than 16% amid rumors its CEO has been detained and that the Chinese government might revoke its license. 500.com insisted those rumors are false and were "conveniently spread during China's seven-day new year's holiday," during which lottery sales are prohibited, anyway. If that wasn't enough, shares of the company also fell earlier this month after it announced a 44% decline in operating profit and warned of further weakness going forward amid increased competition in the space.
Of course, if everything works out as 500.com claims, the stock could be a bargain for risk-taking investors as it trades around seven times next year's expected earnings. However, that risk is too much for my taste. In the end, I feel the need to reiterate my stance that given all this uncertainty, I'm more comfortable watching this situation unfold from the sidelines.
