Chinese online games operator Shanda Interactive (NASDAQ:SNDA) reported an impressive third quarter yesterday, with revenues up 133% year-on-year and net income up 111%. The results have seen shares rocketing up 12% in today's premarket. On the surface it looks like Shanda is firing on all cylinders.
However, a peek behind the earnings numbers shows some disturbing news. There was a slight quarter-on-quarter dip in average concurrent users of its games. Shanda attributed this to a cleanup in automated programs that play the games for users (having a computer play games for you: the epitome of laziness?). Should the number of such "bots" be small, any growth in average concurrent users would have offset it. If such a number was large, though, it calls into question the company's previous reports of concurrent users. Either way, there is now some uncertainty in this metric.
During the conference call the company also emphasized that it would be targeting home users and families by focusing more on casual games in the future instead of massively multiplayer online games (MMOGs). Now this would be a fundamental shift in the company's core strategy thus far (MMOGs made up 76% of the company's third-quarter revenue).
The success of Sina's (NASDAQ:SINA) and NetEase's (NASDAQ:NTES) recent MMOG efforts have shown that there is still a huge market for such games, and Shanda's announcement yesterday seems almost as though it is preparing to concede some market share in its main revenue-driver. It's not like casual gaming is devoid of competition, either -- Sina and NetEase also have a presence here, and as established portals they will have an edge in bringing traffic to their game sites. Shanda's planned movement away from its traditional area of strength is a concern, as is the possibility that the competition is nibbling away at its virtual turf.
Shanda is indeed a company with excellent financials, boasting great revenue growth, strong profits, and a healthy balance sheet. And there is a lot of room for more of the same -- research company International Data Corporation expects China's online gaming sector to be worth $823 million in 2008 (it generated $160 million last year). However, get this: Shanda's current market cap at market close yesterday was $2.35 billion. When a company is worth almost thrice that of its industry (and the industry figure is for 2008, mind you), that is one serious case of irrational exuberance.
For more on Sina's and NetEase's online gaming efforts, read:
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Fool contributor Tim Goh does not own any stake in the companies mentioned.
