Warcraft on the Cheap

Chinese online game purveyor The9 Limited (Nasdaq: NCTY  ) hit the big time with the June 6, 2005, launch of World of Warcraft. The massively multiplayer online role-playing game (MMORPG) is an unqualified hit, and it accounted for a full 99.6% of The9's net revenue in its most recent fiscal quarter.

On Wednesday night, the company reported that fourth-quarter 2005 revenue increased 15% sequentially and net income soared 81%. Those results exceeded analyst estimates. Yet all of this success has barely benefited shareholders. In May 2005, longtime Fool contributor Rick Munarriz wrote about the buzz surrounding the free beta release of WoW in China by The9 and Korean game licensor Webzen (Nasdaq: WZEN  ) . The market capitalization for The9 at that time was $480 million. It is up to only $510 million today. Is this cause for concern? Probably not, but more on The9's value in a moment.

WoW's Chinese launch was highly anticipated. Coca-Cola's (NYSE: KO  ) Chinese subsidiary partnered with game developer Vivendi Universal's (NYSE: V  ) Blizzard Entertainment to create a special TV commercial and a WoW website. The game was already a hit in North America, Europe, and Korea -- and it became an instant success in China.

The company believes the life span for WoW is four to five years, assuming there are the expected continuous upgrades from Blizzard Entertainment. That's about double the life span for a less successful game. So, for the intermediate term, The9 looks to have a cash cow in its portfolio.

What's more, by the end of 2006, the company plans to be testing the recently licensed MMORPG Soul of the Ultimate Nation. This game is said to be the first MMORPG with console-style game mechanics -- fancy words for more player control over the game and "fluid movement and extravagant effects." The game, now being beta tested in Korea, is set for a March 30 release, so there will be plenty of time to see how the game plays in other parts of the world before it opens in China.

Analysts expect The9 to earn $1.35 a share in 2006 -- the first year with 12 full months of WoW income. That prices the stock at 15.6 times 2006 projected earnings -- a very reasonable price, even given China's regulatory environment, and considering that this is a company that analysts expect will grow earnings by 80% per year for the next five years. (That number is a bit misleading, however, since The9 is growing from the microscopic revenue and earnings base it had before WoW.) For comparison, Motley Fool Rule Breakers recommendations Shanda International (Nasdaq: SNDA  ) and NetEase (Nasdaq: NTES  ) trade for 15.1 and 19.6 times forward earnings, respectively, but carry much lower growth expectations.

That robust outlook makes you wonder why The9 is trading 28.7% below its 52-week high. If you were to ask me, I'd say that even though WoW is great, it has plenty of gaming competition in China, and Soul of the Ultimate Nation has yet to rise on a critical, but future, revenue stream. That uncertainty, for now, keeps the stock in comparative value territory.

Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Clickhereto see The Motley Fool's disclosure policy.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 511860, ~/Articles/ArticleHandler.aspx, 10/25/2016 3:01:08 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 5 hours ago Sponsored by:
DOW 18,223.03 77.32 0.43%
S&P 500 2,151.33 10.17 0.47%
NASD 5,309.83 52.43 1.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/24/2016 4:00 PM
KO $42.56 Up +0.43 +1.02%
Coca-Cola CAPS Rating: ****
NCTY $1.66 Down +0.00 +0.00%
The9 CAPS Rating: *
NTES $267.18 Up +3.65 +1.39%
NetEase CAPS Rating: ****
SNDA.DL $0.00 Down +0.00 +0.00%
Shanda Interactive… CAPS Rating: ***
V $83.17 Up +0.82 +1.00%
Visa CAPS Rating: *****