Some people might think that I'm stretching the definition of "e-commerce" by nominating Chinese online gaming company The9 Limited (NASDAQ:NCTY) as my favorite e-commerce play in 2007. But online gaming is a big business, both in China and around the world. According to market research firm DFC Intelligence, the global online gaming market is expected to rise from $3.4 billion in 2005 to more than $13 billion in 2011, while iResearch estimates that China's avid 30 million to 40 million online gamers will spend close to $1 billion in 2007 ... spread among such companies as The9 and Motley Fool Rule Breakers picks Shanda Interactive (NASDAQ:SNDA) and NetEase.com (NASDAQ:NTES).
As I wrote in my recent article, I like The9 not only because it's the purest play in the Chinese online gaming sector -- deriving more than 98% of revenue from gaming services in the most recent quarter -- but also because the company owns the Chinese rights to the world's most popular online role-playing game: Blizzard Entertainment's World of Warcraft (WOW). This is a game that is estimated by The New York Times to have generated $1 billion in revenue in 2006 alone, and Chinese gamers certainly seem to have been big contributors to the game's record-breaking success.
Launched by The9 in China back in June 2005, WOW already has 5.9 million paying subscribers in that country, and the company just announced that peak concurrent users hit a new record of 670,000 at the beginning of the fourth quarter, up from the previous record of 595,000 in the third quarter. These numbers are only expected to climb with the recent release of the new World of Warcraft expansion pack: Burning Crusades -- a module that is currently the best-selling video game on Amazon.com.
Pretty impressive stuff, eh? Well, so are the effects on The9's results. For the third quarter ended Sept. 30, 2006, The9 recorded sales of $29.5 million and net income of $8.1 million, up 29% and 72% from last year's period, respectively. More importantly for investors, these numbers would have been significantly higher if the company hadn't taken most of its servers down for maintenance and upgrading during the quarter.
Now, while World of Warcraft currently is the sole driver of The9's growth (more than 99% of revenue in the most recent quarter), the company has been increasing its stable of games. It's set to launch four major new games that it has obtained exclusive licensing rights to in China -- Granado Espada, Soul of the Ultimate Nation, Guild Wars, and Hellgate: London -- over the next 12 months. Furthermore, just last week The9 announced that it had obtained the rights to operate Ragnarok Online 2: Epic of Light, a game that was voted by Chinese gamers as the most anticipated Korean game of 2007.
In Foolish terms, I believe The9 has a solid foundation in its Chinese World of Warcaft franchise, and the launch of these upcoming games will add significantly to its top- and bottom-line results. I also like the fact that shares of The9 are attractively valued, trading at around 18 times forward conservative earnings estimates -- a 31% discount to the company's projected long-term growth rate.
Please feel free to take a trip to The Motley Fool's CAPS community to rate The9 an "outperform" if you agree that the company has game, or hit the stock with an "underperform" if you believe that I've lost my Foolish mind. At the very least, the free CAPS online database offers you the chance to share your own unique insights and investment philosophy with nearly 20,000 other stock sleuths ... and gain their collective wisdom in return.
Based on your votes on CAPS, we'll crown "The Best E-Commerce Stock for 2007" sometime next week.See all our Foolish candidates for 2007's best e-commerce stock, then add your own ratings in Motley Fool CAPS.
Fool contributor Will Frankenhoff is enjoying his time writing for The Fool more than reading The Financial Times or taking a nap. He welcomes your feedback. He does not own shares in any of the companies mentioned above. Amazon is a Motley Fool Stock Advisor pick. The Fool has a disclosure policy.
