Shanda’s Share Price Plummeting
December 20th, 2005 by MarkI’ve saved up enough money that it’s time to choose another investment. A couple of months ago, I did an analysis on Baidu. At the time, I found the investment very attractive, but I didn’t have enough money to make any investments at the time. A few days ago, I seriously considered making that investment. I’m still just as bullish on Baidu as I was two months ago. It is the dominant player in an industry that will likely be worth hundreds of billions within a decade or two. Baidu’s high (but justified) price has barely nudged within the last two months, and its outlook is just as rosy as it was then. However, I didn’t invest in Baidu this time either.
There is another Chinese tech computer company I’ve been eying for the past year, Shanda (盛大). Shanda (Nasdaq: SNDA) is the leading Chinese producer of video games. All it takes to see the future in this business is one look at a net cafe in any affluent area in the orient . If mainland Chinese people ever play video games like their counterparts in Hong Kong and Taiwan already do, this is a growth industry of epic proportions.
The Numbers
Financial Performance
| 2001 | 2002 | 2003 | 2004 | |
| Net Sales | $4.6 | $326.2 | $600.0 | $1,298.7 |
| Sales Growth | — | 7091% | 184% | 216% |
| Net Income | ($1.3) | $139.3 | $272.9 | $609.5 |
| Net Income Growth | — | — | 196% | 223% |
*revenue and net income in millions. Data from Capital IQ and Shanda SEC filings.
There are no two ways about it. Those numbers show some healthy growth. When considering that Shanda isn’t some upstart, but rather the industry leader, they are phenominal. Still, the most crucial consideration in any purchase is price. Even wonderful businesses such as Ebay have been bought for too much.
The Price Tag
Few things in life have ever stirred such greed in me as that graph. At today’s price of $16.5, Shanda has a market cap of $2.37 billion and a P/E of only $17!!! I nearly purchased a stake in this company for a P/E of 60 earlier this year. The company’s financial health has not changed substantially in the past year. Chinese game companies have been doing an excellent job at wresting control of the local market away from Korean and other foreign publishers. Shanda has over 2.6 million online customers. Sure there have been a few set-backs, such as anti-”net addiction” regulations limiting the number of hours a player may spend on online gaming per day, but a two thirds reduction in valuation is madness! Fear and madness are what direct this insanity! This is just the ideal time for a level headed investor to become greedy. Shanda’s on sale. I just bought 120 shares.
Links
Shanda’s founder slams Wallstreet
Shanda acquires Gametea
Legal Disclaimer: As I just said in the article, I own stock in Shanda. As of the time of this writing I do not own any interest in Ebay. If you purchase any stock solely because I did, you do so at your own risk.
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