Why Shares iDreamSky Technology Crashed to Earth Monday

Source: iDreamSky Technology

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 iDreamSky Technology (NASDAQ: DSKY) fell by a third on Monday, establishing a new 52-week low in the process after the company revised its guidance for fourth quarter and first-quarter revenues significantly lower.

So what: As the following table shows, the new guidance leaves a pretty sizable shortfall relative to Wall Street's expectations:

Source: Thomson Financial Network, iDreamSky Technology

Furthermore, it did not help matters that analysts at Stifel Nicolaus downgraded the shares to 'buy' from 'hold' in a report that included a stinging comment on the company's communications strategy:

We are downgrading the shares of iDreamSky from Buy to Hold as the company preannounced a significant decline in revenue expectations for 4Q14 and 1Q15. We believe game concentration played a role in the shortfall, a risk we have highlighted previously. Management credibility suffers with this preannouncement in our view, in part due to the preannouncement a full 72 days after quarter-end, and releasing the news near midnight ET on a Friday.

Now what
iDreamSky Technology is a Chinese micro-cap mobile gaming development platform, so extreme volatility is part and parcel of the proposition. On the face of it, today's drop appears to put the stock into "deep value" territory – if analysts' estimates were to hold up (they won't), it would now be valued at 4.3 times this year's estimated earnings per -share. The trouble is that the company has virtually no history as a public company (the shares began trading last August), or as a company, period. In that context, and given the industry it operates in, investors ought to consider that iDreamSky Technology is a speculation, not an investment.