Not a Perfect World in China

It's only fitting that Perfect World (Nasdaq: PWRD  ) proves fallible as the world's greatest athletes angle for perfection in the company's home city of Beijing.

Shares of the online role-playing-game company fell 9% yesterday, after coming in at the low end of its revised guidance and simply matching Wall Street's profit expectations. The market was also less than impressed that Perfect World's number of active paying customers and average concurrent users took a sequential dip.

The company's actual results looked pretty solid. Revenue shot up by 158% to $48.8 million. Net income tripled, amounting to $0.40 a share on a fully diluted basis. The company also had a busy quarter, introducing new titles and striking several Asian licensing deals.

The company's namesake game franchise is even a bit of a globetrotter lately, with Perfect World II launching in countries like Brazil and Russia, with a stateside debut in beta rollout this week.

Yesterday's carnage was overdone. Perfect World isn't fading by any stretch. Its top-line guidance calls for a 10% to 15% sequential gain. That is better than Wall Street had been expecting, and an indicator that usage is back up or that Perfect World is successfully milking more revenue out of its users. Either way, Perfect World wins.

The respectable showing comes a week after rival NetEase.com (Nasdaq: NTES  ) also showed better-than-expected revenue gains. The9 (Nasdaq: NCTY  ) came through with a blowout quarterly report earlier this month. Investors won't forget the catastrophic Sichuan earthquake and the three-day mourning period for which online game companies shut down their servers. Still, it seems as if the niche's companies rose above the calamity. We'll know for sure when Shanda Interactive (Nasdaq: SNDA  ) and Giant Interactive (NYSE: GA  ) report later this month.

Is the market's reaction to Perfect World's poorly received numbers overdone? You bet. Keep in mind that the stock was pretty cheap heading into the report. Now it's even more attractively priced. With Monday's markdown, Perfect World is fetching just 14 times this year's projected profitability and a mere 10 times next year's earnings. This is a company growing significantly faster that those teen and preteen multiples would seem to suggest.

This may not be a perfect day for Perfect World, but the valuation's looking ideal for opportunistic investors.

Three more ways to play in China:

NetEase and Shanda were recommended to Motley Fool Rule Breakers premium research newsletter subscribers several years ago, well into their growth cycles. Find out how to play the growth-stock game with a 30-day trial subscription.

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 flawless disclosure policy.


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