Get Into Gaming Stock

by Robert Hsu | May 16, 2012 9:30 am

One new recommendation we have right now is one of China’s leading online computer gaming companies, (NASDAQ:CYOU[1]). CYOU started off as the online gaming division of Chinese web portal giant Sohu, and after achieving commercial success with hit game Tian Long Ba Bu, the company was spun off from Sohu in an IPO in 2009.

Globally, video games have surpassed movies and television as the leading form of electronic entertainment, with online interactive games leading the growth. This is true in China as well.

Massively multiplayer online role-playing games have been a favorite pastime amongst Chinese under 45 years old since the turn of the century. This trend is more pronounced today as more Chinese own computers than ever before and online games offer them an escape from the harsh realities of everyday life into fantastic virtual realms. Because most Chinese under 30 years old have no siblings, these games help young Chinese interact and connect with others without leaving the safety of their homes.

Changyou’s Tian Long Ba Bu, in its fifth year of operation, is one of the most successful games in China. Tian Long Ba Bu is a popular Chinese novel written in the ’60s and has been adapted into multiple TV series and movies in the past. In addition to Tian Long, Changyou has another hit game, Shen Qu, as well as four new games in its pipeline.

During my latest trip to China, I spoke with several online gaming enthusiasts who told me that the company’s multiplayer games are all the rage, and that the company has the top new games for both experienced and novice online gamers. I believe that the company will be able to sustain its earnings and growth going forward.

Another reason to buy CYOU shares here is the company’s recent price action. The stock has sold off to the low $20s from $29 over the past two months, near its long term support. I expect this support to hold up given the company’s robust fundamentals[2].

The stock is cheap right now with a trailing 12-month P/E of only 4.8. On May 1, the company reported 2012 Q1 net income above Wall Street’s expectations. Quarterly net income for Limited rose 11.7% to $65.3 million ($1.22 per share) from $58.4 million ($1.10 per share) year-on-year. Revenue rose 30.4% to $136.8 million year-on-year.

The company reported adjusted net income of $1.24 per share, ahead of the mean estimate of $1.10 per share. My six-month target for this stock is $29.60, which is six times the company’s $4.90 projected EPS this year.

  1. CYOU:
  2. given the company’s robust fundamentals:

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