Shanda Games (GAME): Video games 'pack potential'

"Shanda Interactive (NASDAQ: SNDA), a Chinese purveyor of interactive entertainment and media technology, offered U.S. investors a piece of its video game business, Shanda Games (NASDAQ: GAME)," notes Brandon Clay.

In Invest with an Edge, he explains, "Shanda Games has its risks but also packs a lot of potential, especially as a speculative China play." Here's his review.

"GAME was one of the most widely-anticipated IPOs of 2009. The buzz surrounding Shanda Games was so intense that the company raised the offering from 63 million to 83.5 million shares just to meet demand.

"But something happened on the way to the party. Investors didn't offer such a warm reception for Shanda Games. While the offering raised $1.04 billion for Shanda, the shares closed down 14% from the IPO price of $12.50.

"Why the sell-off?  Underwriters frequently try to generate interest by pricing IPOs at a low price, thereby generating an opening day pop.

"The opposite might have happened in this case: Lead underwriter Goldman Sachs (GS) launched GAME at a price that was fair or even a little high.

"A few large investors jumped out quickly, and the stampede was on. But as our editor, Ron Rowland, always says, 'if the purpose of an IPO is to raise capital for the company selling the shares, then having the price fall on day of the IPO makes it a huge success because it is evidence that they raised the maximum amount of capital.'

"The question now is whether the stock will go up from here. Shanda Games has strong fundamentals. Profit soared 75% to $98 million and sales rose 43% to $322 million in the first half of 2009.

"Shanda Games has its risks but also packs a lot of potential, especially as a China play. The Chinese are crazy about computer and video games, but market penetration is less than 20%.

"A huge market with a rabid interest in its products gives GAME the potential for strong returns over the long term.

"Since Shanda Games hasn't even been trading for long, technical analysis is difficult at this point. However, at current levels, GAME offers investors a way to speculate on the explosive growth potential of China. For a China play in video gaming, go with GAME."