What happened
Shares of Changyou.com (CYOU) fell 18.2 % in July, according to data provided S&P Global Market Intelligence. The stock lost value late last month amid a broader sell-off that hit the tech sector and then took a significant hit following the publication of its second-quarter earnings results.
Changyou reported its second-quarter earnings on July 30 before the market opened. Sales were down 25% compared to the prior-year period and 18% sequentially, landing at $113 million. Net income for the period came in at $32 million -- down 38.5% year over year.
Image source: Getty Images.
So what
The weak earnings report and broader tech stock sell-off pushed Changyou down to a 52-week low late last month. The publisher's latest big mobile game release has not performed up to expectations and its legacy titles are losing steam. Updates and new features have been introduced for key titles, and while these efforts have helped to slow the rate of sales declines, it's not surprising that investors are concerned about the trajectory.
Now what
Changyou stock has seen some recovery in August as fears of a broader tech sector sell-off have lessened somewhat. Shares are up roughly 12% in the month as of this writing.
CYOU Price data by YCharts.
Changyou is moving ahead with its game development strategy and continues to focus on the massively multiplayer online role playing game (MMORPG) genre and plans to branch into new genres simulation games (SLGs). Here's CFO Yujia Zhao discussing the company's focus going forward -- with a transcript quote courtesy of Thomson Reuters:
For mobile game development, we will remain focused on producing top-quality games. And MMORPG will continue to be a core part of our strategy. Meanwhile, we are exploring the development of advanced casual games and SLG games. Our team will seek to make breakthroughs in graphics, game design, gameplay, so as to adapt to the continuous changes in the gaming market and meet the ever-increasing needs of users.
I purchased shares in the company in the lead-up to its earnings release and then added to my position after the post-earnings sell-off. Changyou trades at just 11.5 times this year's expected earnings and 1.6 times expected sales -- levels that I think look attractive in light of its strong balance sheet, economic and industry-specific tailwinds in the Chinese market, and the potential for the company to deliver rapid growth if one of its upcoming titles lands as a hit.
