A Perfect Opportunity for Growth in a Perfect World (PWRD)
The
coverage for Perfect World was suppose to be on June 1st 2012,
however I decided to break this company down earlier since the company will be
reporting Q1 2012 numbers on May 21st. This company has a lot of
potential and I wanted to cover this stock earlier because this stock seems too
good to miss before earnings.
Not many
people know what this company is, therefore here are the basics broken down of
the company:
·
Chinese Gaming Company located in Beijing
·
Fairly new company, founded in 2004 and went
public in mid 2007
·
Makes many of the most popular MMORPG (massively
multiplayer online role playing games) in China including Empire of the
Immortals
·
Is operating in other countries such as Russia , Japan ,
Europe and United States
·
Expanding in social media to enhance their
online casual games. So far only one has been launched “Hot Dance Party” that
came out in March 2009
When looking into this company’s fundamentals, it is safe to
say that although this company is fairly new, is company has solid numbers on
the table and this allows room for growth.
Key numbers to look at:
·
Book value of $13.58, this stock currently
trades just around this price
·
Price/Book is 0.96, meaning that this stock has
been trading around its book value
·
Profitability is pretty solid with profit margin
and operating margin at 32% and 34% respectively
·
Positive cash flow, with $363M in cash (or
$7.86) and $89M in debt
·
Volume is relatively low for the past year with
volume around 1.5 M
Because there is relatively low information about insider
buying and institutional buying, looking at the analyst coverage is pretty
important for an international company.
Currently,
9 analysts cover Perfect World (PWRD) .
From
looking at the ratings, it seems that generally there is positive potential for
Perfect World. Also Zack.com puts this stock has #1 on Strong Buy as well.
When looking at a company like Perfect World (PWRD) that has
competition, we have to look to competitors and the advantages/disadvantages
with competition.
Some of the main competitors may include:
- NetEase.com (NTES)
- Giant Interactive Group (GA)
- The9 Limited (NCTY)
- Sohu.com (SOHU)
- Shanda Games (GAME)
From the
companies that are mentioned from above, we can see that Perfect World does
have a lot of competition for the gaming and social media market in China .
Personally, I believe that the biggest competition is with NetEase.com (NTES)
as it does have $2B in cash and no debt which is nothing to compare with Perfect
World (PWRD) currently. However, I believe that Perfect World (PWRD) can mirror
Netease.com’s (NTES) success with the current management team and continued
growth. As for the other competitors, I do not see it as the same level of
value as Perfect World because of the continued growth that Perfect World has
shown that most of the other companies still have not proven.
The biggest concern however is looking to see if Perfect
World (PWRD) can sustain its growth for upcoming years. In the past 3 quarters,
we have seen great numbers reported and as beat estimates on average of 50%! As
you might expect, the stock has rallied on average of 15% in the past 3
quarters every time they have reported. The most recent quarter that was
reported in March had growth increase $11 million up to $124 million in
revenue. The Street’s estimates are pretty conservative on Perfect World (PWRD)
and every time Perfect World (PWRD) has exceeded these expectations. Also, the
forward earnings for 2013 is as low as 0.60. These numbers can be easily be
beat and make this stock jump. We also see a 25% revenue growth in 2011 and
this is a good indicator to what we may see this year.
As always, when investing we have to draw out the pros/cons.
Pros
|
Cons
|
Great previous quarters, blowing estimates
|
Little info on institution/ inside ownership
|
High growth potential still and profitability returns are
better than ever
|
Chinese economy slowdown could affect business
|
Diversified in international market; not just
|
Sustainable profitability and growth
|
Value play, below book value
|
Competitive Market
|
Great analyst coverage
|
A bit volatile with beta around 2.00
|
Good cash flow, cash positive/ no debt
|
Continued innovation with new products
|
Good management/experience
|
Expansion can overwhelm expenses
|
Revenue continues to grow
|
|
Low projections by Street on forward P/E
|
From looking at the past performance and future projections,
Perfect World definitely has some momentum going into the future and as long as
the management can sustain a fairly consistent growth; this stock is a great
growth play for any portfolio.
Disclosure: I am long PWRD. I have a price target of $25 by
the beginning of 2013.
Great job! I like the detailed analysis
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