No, the game isn't over at Shanda Interactive (NASDAQ:SNDA). It's just going to have a tough time making it to the next level. The online gaming giant in China suffered a sequential dip in its quarter ending in September, but the company is still showing some healthy year-over-year growth.
Net revenues climbed 41% higher to hit $61.7 million, as earnings per share rose by 62% to hit $0.44. However, the bottom line was pumped up by a one-time tax benefit. Operating profits told a grimmer tale, with Shanda's operating income rising by just 7% year over year and falling by 38% sequentially.
That's not what investors were expecting. The culprit appears to be a sharp decline in the company's multiplayer role-playing games. The average number of Chinese players taking part in Shanda's virtual worlds at any given time has dropped from 763,000 in the quarter ending in June to just 630,000 today.
The company is doing much better with casual games, but its leadership position in MMORPG (massively multiplayer online role playing games) first attracted David Gardner to the stock nearly a year ago as a Motley Fool Rule Breakers recommendation. In that market, the company has faced some serious competition from The9's (NASDAQ:NCTY) World of Warcraft and NetEase.com's (NASDAQ:NTES) Fantasy Westward Journey.
Earlier this week, NetEase also disappointed the market with its latest quarterly report, but at least NetEase saw its profits more than double on an 83% uptick in revenues. Then again, NetEase was also a Rule Breakers stock pick, and it has actually been beating the market since its selection.
So is it time to throw in the towel on Shanda? Not so fast. The market's negativity has already been priced into the shares. The stock is trading at just 12 times next year's Wall Street profit projections, and this is still one of the top three gaming companies in China. As the region's economy improves -- bringing disposable income levels and wider acceptance of online gameplay with it -- Shanda, NetEase, and The9 all stand to benefit from inevitable trend.
Was Shanda a bad pick for David's ultimate growth newsletter? The jury's still out. Besides, this kind of volatility is expected; great returns come with great risks. No, Shanda hasn't panned out so far, but David has recommended two other stocks in recent months that have more than doubled so far. Want to learn more about them? A free trial subscription is just a click away.
Longtime Fool contributor Rick Munarriz believes in the sector, but he does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
