Gaming Pays Off in This Country

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Shares of Perfect World (NAS: PWRD) are soaring today after the Chinese online gaming company delivered blowout quarterly results and announced a meaty one-time dividend.

Revenue climbed 32% to $123.4 million, even though the aggregate average of concurrent users -- basically the average number of people playing Perfect World games at the same time -- slipped from 999,000 to 873,000 gamers. There's obviously no shame in making more money out of fewer people, and given the scalable nature of this model, it's a bottom-line blessing. Profitability more than doubled to $0.87 a share or $0.94 a share on an adjusted basis.

In short, Perfect World crushed Wall Street's targets on both ends of the income statement.

Perfect World is feeling generous about its good fortune. It will shell out a special dividend next month that amounts to $2 for every American depositary share. Why not? The company is flush with $341.6 million in cash.

Sure, one can argue that Perfect World would be better served using that money to either buy back a chunk of its sorely undervalued shares or acquire smaller online gaming companies. Seeing how the stock is reacting to the one-time distribution, maybe Perfect World is making the right call.

I took a look at the ridiculously cheap valuations in this sector earlier this month. Some of the names have moved higher, but the earnings-based multiples are still too low based on last night's closing prices.   

Company

2012 P/E

2013 P/E

Giant Interactive (NYS: GA) 6.66.0
NetEase.com (NAS: NTES) 12.110.6
Perfect World4.43.9
Changyou.com (NAS: CYOU) 5.54.9
Shanda Games (NAS: GAME) 5.34.9

Source: Yahoo! Finance.

These are companies that are growing a lot faster than the low multiples suggest. Giant Interactive -- the company behind the ZT Online franchise -- posted a 34% surge in revenue in its latest quarter. NetEase delivered a 28% pop on the top line. Changyou took a hit after offering up uninspiring guidance last month, but it's still growing nicely. Shanda Interactive -- the company that spun off Shanda Games -- got so cheap that it decided to go private earlier this year.

Even with today's pop, Perfect World is sorely undervalued -- and that's knowing full well that analysts will scramble to raise their profit targets.

Game on, China.

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NetEase has more than quadrupled since I recommended it to Rule Breakers newsletter subscribers seven years ago, but now it's time to discover the next rule-breaking multibagger. It's a free report. Want it? Get it.

At the time this article was published  Motley Fool newsletter services have recommended buying shares of NetEase.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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