Buy This Former Highflyer On The Dip Now!
The Dynamic Wealth Report
October 15, 2009
by Robert Morris, Editor
My daughters love to play video games. They’ll play for hours and hours
if I let them. Those of you with children in your lives know what I’m
talking about. Kids are just crazy about video games.
I’m going to let you in on a little secret…
I love to play video games too. A few years ago I bought an Xbox 360
video game system… for my girls of course (wink, wink). The high def
graphics are amazing. And, the games are a blast. (Quite a step up from
the Pong system I had as a kid!)
Last weekend we picked up a copy of Marvel Ultimate Alliance 2.
For me this video game has it all.
I get to play as the Marvel superheroes I loved as a boy… Captain
America, Spiderman, and the X-Men to name a few. More importantly, my
girls and I can battle evil villains together as a team. (It’s a great
way to have some quality family time.)
Believe it or not, video games also offer huge profit potential for savvy
investors. But, you have to look beyond the more mature American and
European markets.
The place to make money in video games right now is Asia.
One Asian market specifically is expanding faster than all the others. If you guessed China, give yourself a pat on the back. More on that in a
moment…
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First, let me describe how the Chinese market is different from ours. Instead of Xbox or PlayStation, the Chinese prefer to play video games
over the internet. This trend has spawned an entire industry centered
around online gaming.
China’s online gaming market is one of the fastest growing in the world.
It’s increasing at a staggering 30% to 50% clip. Total sales are
expected to be around $3.5 to $4.0 billion this year.
The industry is benefiting from the huge internet boom in China.
The number of internet users in China is now larger than the entire U.S.
population. In fact, it’s the largest internet population in the world
at 338 million users. (And, they haven’t even hooked up all of the rural
areas yet.)
As you might imagine, this rapid growth has attracted a number of
players to the industry. The company with the largest market share is
Shanda Games (GAME), a recent spinoff from Shanda Interactive
Entertainment (SNDA). The next biggest is NetEase.com (NTES). Another up
and comer is Perfect World (PWRD).
All three companies are sporting long-term earnings growth rates of 20%
to 30%. But, there’s another company that I like better. It has similar
growth prospects and offers more upside potential right now.
That company is Changyou.com (CYOU).
CYOU was spun-off from Chinese internet giant Sohu.com (SOHU) in April
of this year. It’s the most successful IPO of 2009 so far.
In its debut, CYOU soared 75% from an offering price of $16 to close at
$28. But, the rally was just getting started. The stock continued
climbing higher for weeks until it finally peaked at $48.37 in July.
That’s an amazing 202% gain in just three month’s time.
Since then, the stock has pulled back significantly. As I write, CYOU is
trading at just over $31 a share… about 36% below its all time high.
What prompted this fall from grace?
The company’s decision to delay the launch of three highly anticipated
new games until next year. This provided an excuse for many investors to
cash in their short-term profits.
But, I see this pullback as a tremendous buying opportunity.
CYOU offers huge growth potential. Revenue is projected to grow 21% next
year to $328 million. And, earnings per share are forecast to jump 14%
to $3.19.
Plus, I think there’s upside to these numbers.
The consensus 2010 earnings estimate has dropped recently because of the
delays. This lowers the bar for CYOU and increases the chances for
upside surprises in coming quarters. Remember, nothing drives a stock
higher like better than expected earnings.
In addition, CYOU’s valuation is very attractive at these prices.
The company’s projected long term growth rate is 21.5% annually over the
next five years. Right now their price to earnings ratio is 11 times
this year’s earnings estimate of $2.79. These figures yield a PEG ratio
of just 0.51.
In other words, the stock is trading at a 50% discount to its long-term
growth rate.
I think there’s a good chance these shares will at least double over the
next 12 months. Of course, this depends on the company successfully
launching their new games.
In this competitive industry, the company with the hottest new games
tends to see market share, revenue, and earnings rocket higher. And
when that happens, their stock price usually follows suit.
Take a closer look now at CYOU for your own account. This is one
terrific buying opportunity you don’t want to miss.
U.S. market indexes rallied hard yesterday on better than expected
earnings from Intel (INTC) and JPMorgan Chase (JPM). As a result,
leveraged broad market ETFs posted some big one-day gains. The biggest
gainer was ProShares Ultra Russell3000 ETF (UWC) with a one day return
of 11.55%. This fund seeks daily investment results before fees and
expenses that correspond to twice (200%) the daily performance of the
Russell 3000 Index. That index is comprised of the 3,000 largest U.S.
companies, which is about 98% of the investable U.S. equity market.
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