Global experts eye Shanda (SNDA)

Today, we continue our look at the China online gaming sector, where two leading advisors turn to Shanda Interactive Entertainment (NASDAQ: SNDA).

Nick Vardy in The Global Bull Market Alert explains," The Shanghai-based firm is out choise to increase our bet on Asia." In addiion, Andy Obermueller, in his Government-Driven Investing, notes, "China’s online gaming market is slated to surge." Here are their reviews.

Nicholas Vardy says, "I expect this small-cap stock to be a solid, risk-return trade, especially if you are willing to endure some volatility.

"First, Shanda operates online games in the People’s Republic of China and is a pioneer in the hugely complex role-playing games that people play over the Internet.

"Shanda already has 7.2 million paying users involved in its cutting-edge MMORPG (massively multiplayer online role-playing games). That's up more than 22% sequentially from the fourth quarter. 

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"China continues to be a hotbed for online gaming and, with the growth in active gaming from the under-18 and over-40 crowd, China is on track to overtake the United States as the largest online gaming market in the world by the end of 2009.  

"Second, unlike many other online companies, Shanda is actually making money. The company recently announced better than expected financial results. 

"Revenue rose 42% to $162 million, and earnings on a per-share basis rose 35% to $0.78 per ADS (American depositary share), topping the consensus by 8.3%.

"More importantly, next year's estimates climbed to $3.53 per share, putting Shanda on a forward P/E of 17.6 -- more than reasonable for a company growing at the rate it is.

"Here’s a word of warning. Shanda combines three volatile elements. It is Nasdaq listed, a China play, and a small cap stock all rolled into one. 

"That means potential for stellar returns, but at the cost of gut-wrenching volatility. As a momentum play, it also has the potential for sharp sell-offs. So you may want to take a smaller position than usual on this one."

Andy Obermueller notes, "In China, internet users understand and embrace the 'come, stay, pay' model; that's where a site allows users to access a few things for free, but they have to pony up for the good stuff.

"This works particularly well with games. One of the leaders in this space is Shanda Interactive Entertainment. Gamers at its site use prepaid cards -- available at more than 320,000 vendors -- to add money to player accounts that can be used to access all of the features of its games. 

"Its most popular offerings are role-playing games that allow thousands of gamers to play the same game together. Many of these games combine historical, martial arts and combat themes.

"Shanda, for its part, has engineered eight significant acquisitions since 2004. But its latest purchase isn't for a new game, it's for an online music distributor called Hurray! that not only sells songs but also produces concerts and sells music-related products like ringtones.

"The marriage of these two companies brings together a large and loyal tech-savvy community willing to pay for content with a company ready to move other digital products through Shanda's channel.

"This not only is an obvious win for consumers, but it also has the support of record companies, who are dismayed that China's entire music market is unlicensed.  

"Shanda's stock has given up some ground recently, though even at 21 times earnings it has to be considered cheap given its growth and its prospects, not only in gaming but in music. 

"Applying Shanda's five-year CAGR in earnings to its current earnings per share implies a fair market value of $93.50 a share within a year, assuming an earnings multiple of only 25. That's roughly 60% above Shanda's current price."