Chinese online gaming company Changyou (NASDAQ:CYOU) earned itself a nice 3%-plus bump on some positive earnings news Monday. But even around $25, the stock still is trading at about half its value from its 2011 heyday — possibly presenting a bargain for investors wanting to get into a lesser-ballyhooed aspect of the Chinese growth machine.
Here’s at least a few things to like about Changyou right now:
It’s in China: The banner number for the country’s economic growth is 7.5% — that doesn’t specifically apply to online gaming, but what it does indicate is Changyou at least is operating in one of the largest and fastest-growing economies in the world. However, the more applicable number is 20% — that’s the low end of the growth range expected for the Chinese online gaming industry, according to Analysys International. Here’s a quick look at the firm’s growth projections for the industry:
|Estimated YOY % Increase||20.7%||23%||20.5%|
In-sector growth: In 2011, Changyou was the fifth-biggest player in terms of revenues at just 7% of the market, well behind leaders Tencent (PINK:TCEHY), Shanda (NASDAQ:SNDA) and NetEase (NASDAQ:NTES), and just behind Perfect World (NASDAQ:PWRD). So, it has market to gobble should it take the initiative – which it has. Its 2011 acquisition of 7Road yielded the Web-based game Shen Qu, whose popularity helped drive up accounts.
Chanyou also plans further expansion of Web-based, mobile and social games. Also, it just integrated the Chinese game information portal 17173.com, which brings in revenue through advertising.
Earnings: Monday’s earnings report was strong across the board. Income came to $65.3 million ($1.22 per share), up 12% year-over-year, and revenues of $136.8 million jumped 30%. Adjusted EPS came in at $1.24, easily clearing the $1.11 bar set by analysts and keeping alive a string of earnings beats from last year.
Valuation: Dirt. Cheap. CYOU currently is trading at just more than 5 times 2012 earnings, which admittedly are expected to be flat compared to 2011’s numbers. However, its forward P/E comes in at less than 5 in anticipation of double-digit earnings growth in 2013.
Price targets: You’ll always want to take analysts’ word with a grain of salt, but for what it’s worth, their average target for CYOU is around $37 per share, or almost 50% better than current prices. And even then, CYOU would be trading around a reasonable-to-cheap 8 times earnings. Not bad.
Kyle Woodley is the assistant editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley.