Shanda Lands a Plan, Duh

You're no longer a turnaround story after you've turned around. That's an axiom that may be lost on analysts following Motley Fool Rule Breakers recommendation Shanda (Nasdaq: SNDA), as the Chinese online gaming giant posted another market-thumping quarterly report.

Revenue soared 39% to hit $74.1 million in the second quarter. Earnings, before a one-time gain related to the company's sale of its stake in SINA (Nasdaq: SINA), soared 78% to $0.42 per American depositary share (ADS).

Wall Street was expecting the company to earn just $0.36 per ADS on $72.4 million in revenue. The pros have been perpetually humbled by Shanda. This is now the fifth consecutive quarter in which the company lapped the market's profit targets by at least $0.06 per ADS.

Maybe the market doesn't understand that Shanda's failure to make the EZ Pod a popular entertainment appliance in China is no longer an albatross around its neck. The EZ Pod device, which at one time was the company's bold bet to transform home PCs into interactive television-like platforms, has been a dud, but does it matter? Online games now make up 96% of Shanda's revenue mix.

Maybe the market also doesn't understand that the same free gaming model that most of us ridiculed -- where gamers play games for free,then pony up for virtual accessories and expansion packs -- is working. It took a great deal of humility to go from Come-Pay-Stay to Come-Stay-Pay, but the numbers validate Shanda's decision to build communities around its titles.

Yes, China's online gaming market is getting crowded, but just three players -- NetEase (Nasdaq: NTES), The9 (Nasdaq: NCTY), and Shanda -- account for roughly 60% of the market.

Whether it's the West's eye candy of The9's World of Warcraft or the simplified elegance of NetEase's Fantasy Westward Journey (which remains China's most popular game, perhaps because of a graphical simplicity that makes it playable on older machines), the three leaders are well-entrenched at the moment.

Competition? Internet cafe crackdowns? Hard times for the EZ? Let the analysts be the worrywarts. If recent history is any kind of teacher, they will continue to doubt Shanda's renaissance and be at least six pennies short in three months, too.

For related Foolishness:

• Review Shanda's last quarter.
• Shanda has been singled out as a cheap stock.
• Shanda is not only cheap; it's a growth stock, too.

NetEase and Shanda are Motley Fool Rule Breakers recommendations. A free 30-day subscription offer is available if you want to give it a whirl. SINA is a Stock Advisor pick.

Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin gaming stocks for a long time. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. The Fool has a disclosure policy.