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Why Changyou.Com Ltd. Shares Plunged

By Brian D. Pacampara, CFA – Feb 10, 2014 at 12:13PM

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Chinese online game operator Changyou.Com Ltd (CYOU) sank 10% this morning after its quarterly results and outlook disappointed Wall Street.

So what: The stock has been highly volatile over the past year on growth uncertainty, and today's Q1 results -- EPS of $0.82 blew out Wall Street but a revenue increase of 12% missed estimates -- coupled with downbeat guidance only reinforce those concerns. In fact, gross margin during the quarter fell 200 basis points over the year-ago period, suggesting that its licenses and, in turn, its competitive position, are getting more expensive to maintain.

Now what: Management now sees a Q1 loss of $0.42-$0.30 per share on revenue of $174 million-$180 million, well below the Wall Street consensus of a $1.04-per-share profit and on a top line of $199 million. "We ended fiscal year 2013 with revenues across each of our businesses reaching new highs in the fourth quarter, and solid growth in our top-line results for the full year," said CFO Alex Ho, who also announced his resignation to start a new business. "With the consistent rich cash inflows from our existing businesses, we are in a good position to continue investments in mobile games and new software applications of our platform initiative." More importantly, with the stock now off more than 35% from its 52-week highs, it might be an opportune time to buy into that bullishness. 

Brian Pacampara has no position in any stocks mentioned, and neither does The Motley Fool. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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