Shanda Games Limited(ADR) (GAME): Can This Small Cap Stock Engineer a Turnaround?

Not all small cap companies are destined for greatness and the same holds true for Chinese online gaming company Shanda Games Limited(ADR) (NASDAQ:GAME), at least for now. While the industry in which Shanda plies its trade is growing, its revenue and stock price have been shrinking at an alarming rate. The stock has depreciated around 30% in the last 52 weeks, and there aren’t any signs of relief yet.

Falling behind

Although online gaming will be one of the primary drivers behind the growth of the overall gaming industry according to Digi-Capital, Shanda Games Limited(ADR) (NASDAQ:GAME) doesn’t seem ready to ride this growth yet. The company posted yet another disappointing quarter just recently where it missed the earnings estimate. To make things worse, revenue dropped 20% from the prior-year period and this was accompanied by a 26% decline in non-GAAP net income.

In addition, it seems that the company is focusing more on quantity rather than quality. Even though it witnessed a slight increase in average monthly active users, the number of average monthly paying users declined almost 5% since Shanda tried to attract more users by giving away freebies. This is in stark contrast to its peer Giant Interactive Group Inc (ADR) (NYSE:GA)’s performance in its recently reported quarter.

A solid business model helped Giant deliver impressive revenue and earnings improvement in the previous quarter. Its active paying accounts rose 6.1% driven by its addictive games and strategy of platform diversification. Moreover, Giant is quite confident about its online gaming business and is now taking a leap into mobile in search of more room to run.

Where are the results?

On the other hand, even though Shanda Games Limited(ADR) (NASDAQ:GAME) has been following similar strategies to salvage itself, they hardly seem to be effective. The company has been trying to develop a portfolio of long-lasting games in the mould of Activision Blizzard, Inc. (NASDAQ:ATVI)’s World of Warcraft which would help it establish a steady revenue stream in the long run.

WoW has been in action for around 8 years now as Activision has kept the game in good health through a series of expansion packs. The game accounts for almost 30% of the game publisher’s revenue and the Street keeps one eye on the subscriber count of WoW every time Activision reports results. Thus, Shanda’s initiative of developing similar games is noteworthy and it is trying to turn Mir II, Woool, and Age of Wushu into long-term revenue generators.

However, these initiatives haven’t delivered revenue growth yet and this is why it would make sense to take management’s optimistic tunes with a grain of salt. But Shanda might make a minor comeback of sorts as the year progresses. Let’s see why.