The Cheapest Game in China

Mr. Market seems to have forgotten about The9 (Nasdaq: NCTY  ) . Now is your chance to pick up the out-of-favor online gaming specialist in China for a pittance.

The9 isn't a great buy because of last night's earnings report. Earnings soared 158% to $0.52 a share and net revenue climbed 29% to $60.2 million, but it isn't good enough for Wall Street. Analysts were looking a profit of $0.55 a share on $68.2 million in net revenue.

The9 also isn't a great buy because it's a leader in its niche. Over the past few weeks:

  • NetEase.com (Nasdaq: NTES  ) posted a 41% increase in quarterly revenue to $118.8 million.
  • Sohu.com (Nasdaq: SOHU  ) is a relative newcomer, but it too is on a trajectory to lap The9 after generating $54.6 million in online gaming revenue this past quarter.
  • Perfect World (Nasdaq: PWRD  ) is on a similar pace, after growing its top line by 79% to $56.2 million.
  • Pioneer Shanda Interactive (Nasdaq: SNDA  ) reports in two weeks, but analysts expect the company to generate more than twice the revenue that The9 rang up.

Finally, The9 isn't a great buy because it's a proprietary powerhouse. The company's claim to fame is that it is the one responsible for rolling out Activision Blizzard's (Nasdaq: ATVI  ) World of Warcraft in China. It will also get some FIFA Online loving since Electronic Arts (Nasdaq: ERTS  ) acquired a 15% stake in The9 last year, but the company is just now starting to produce some in-house titles. That is important because even Activision Blizzard is playing the field. It brokered a licensing deal with NetEase this summer for many of its other franchises.

So why is The9 such a screaming buy? Well, the company closed out the quarter with $329.5 million in cash and short-term investments -- or $11.90 a share when divided by its 27.7 million shares outstanding -- with no long-term debt.

Disappointed with the company's miss, the stock opened at $11.70 this morning. Can you believe it? A perfectly profitable company working on chunky profit margins was actually dumped for less than its liquidity! The stock quickly bounced back, a great sign that the market is only temporarily irrational. However, warts and all, investors are getting a great deal this morning.

The9 may not be an earnings beater, an industry leader, or a proprietary feeder, but in these iffy times, it's a stock that is unlikely to head much lower as long as money keeps flowing in the right direction.

Three more ways to play The9:

NetEase and Shanda are Motley Fool Rule Breakers recommendations. Electronic Arts and Activision Blizzard are Motley Fool Stock Advisor picks. A free 30-day subscription offer is available for either newsletter service.

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.


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