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China's Biggest Loser in Online Gaming

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After watching its rivals post largely impressive quarterly results in recent weeks, China didn't save the best for last with Perfect World (Nasdaq: PWRD  ) .

New games and franchise expansion packs couldn't save the online gaming specialist from shrinking. Revenue slipped to $89.8 million as adjusted earnings were nearly halved to $0.43 a share.

Analysts figured Perfect World wasn't going to keep up with some of the country's gaming speedsters, but even they weren't this pessimistic. Wall Street was banking on an adjusted profit of $0.53 a share on $90.4 million in revenue.

Perfect World argues that it's deliberately drawing out its development cycle to improve the quality of its releases, and slowing the monetization process to draw in more gamers. The strategy is producing mixed results for now. Perfect World boosted its audience size sequentially, though the gamers are generating far less revenue. Either way, Perfect World is still reaching out to a smaller audience than it was a year ago.

There's a clear gap in China between the online gaming companies that are growing and those that are falling behind. Perfect World joins Shanda Interactive (Nasdaq: SNDA  ) in posting lower online gaming revenue and profitability.

The earlier reports out of (Nasdaq: CYOU  ) , (Nasdaq: NTES  ) , and Giant Interactive (NYSE: GA  ) were far more encouraging. All three of those gaming specialists posted year-over-year top-line growth of at least 30%.

Analysts have been slow in sorting the winners from the losers. Perfect World and Shanda Interactive have missed Wall Street expectations more often than not over the past five quarters.

Hopefully, investors are taking better score.

Perfect World's cash-rich balance sheet means that it's not racing against the clock. Value investors may also point to the low earnings multiple after earning an adjusted $2.68 a share for all of 2010. However, cheering a single-digit trailing P/E isn't exactly terra firma if net income continues to decline.

Perfect World better hope that its deliberate strategies play out correctly.

Will the online gaming sector in China bounce back for all players? Share your thoughts in the comment box below. is a Motley Fool Rule Breakers selection. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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

Read/Post Comments (1) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 09, 2011, at 9:19 AM, Fliujniligui wrote:

    Well, the fundamentals are rock solid.

    I installed a game, Battle of Immortals, from PWRD and it rocks. It was released somewhere in 2009. For me, it is obvious that sacrificing short term numbers that stupid analysts look at to boost R&D and release big games is a good deal for the long run.

    PWRD is solvent and run by competent management which is able to say to short term oriented speculators :''Go _ _ _ _ yourself'' and the word is not heal. To do so, they are even buying back their stocks while they are cheap. They are saying that if you are interested to vote with your feets, a buyer will be available and it is the very company which you sell.

    This company is a game powerhouse.

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