March 1, 2010 (Chinavestor) There is a serious disconnect between what analysts say and what the street says when it comes to the earnings of Shanda Games (NASDAQ:GAME) and her parent company, Interactive (NASDAQ:SNDA).Reading headlines of various analysts the picture is rosy. One from Market Watch says "Shanda Profit Climbs 44% in fourth quarter" the other from Trading Markets reads "Shanda Games net surge 55% in 2009". So the stock should be on fire, right?
Instead, Shanda Games (NASDAQ:GAME) collapsed on pre-market trade and is trading at $6.92 or -16.26% lower at noon. Or take a look at Shanda Interactive (NASDAQ:SNDA), a stock that lost -9.98% only... So what's the story?
What we found one of the best ways to asses the situation is to look at revenue and profit growth from a distance. We all know that the Street likes stocks with relatively constant revenue and earnings growth. Earnings are ultimately driving stock prices and thus earnings dynamics is key in predicting stock prices. Looking at revenue and earnings growth for Shanda Interactive (NASDAQ:SNDA) for the last three years (GAME IPOd in 2009 with limited historical data, so we use SNDA instead), the picture is not so bad. The company demonstrated its ability to deliver a relatively constant sales growth. What's missing is constant earnings growth. This is what's hurting the stock, no doubt.
The trick is this: while revenues and earnings grew on a year-over-year basis, profits FELL significantly from last quarter as the break in the red line testifies. So when analysts point out how revenues and earnings increased - the Street knows that truth.
But there are two important developments that the Street is missing out in my opinion. For one, Shanda Interactive (NASDAQ:SNDA) has been strong on sales growth. This is paramount because top line growth is the basis of earnings growth. So even though SNDA missed out on earnings, the -10% correction to me seems excessive.
The other fact that the Street is missing out is that Shanda Interactive (NASDAQ:SNDA) peaked out in June 2009 above $60/share and is trading at $40 right now. I don't see a mismatch between profit growth and share price over the last 6 months. This implies that the current -10% drop is irrational.
If this is the case, Shanda Games (NASDAQ:SNDA) and Shanda Interactive (NASDAQ:SNDA) are presenting buying opportunity at current prices. SNDA is at $41.02 right now while GAME is trading at $6.93. Let's revisit this issue in 3 months time.
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