Perfect World Shares Dropped: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of China-based online games developer Perfect World (NAS: PWRD) don't look perfect today after falling as much as 14.4% amid heavy trading.

So what:Perfect World's third quarter missed analyst estimates, even though rivals from Shanda Games (NAS: GAME) to Giant Interactive (NYS: GA) easily beat their Street targets. Making matters worse, Perfect World only just met its own revenue guidance -- after lowering it mid-quarter.

Now what: "Quarterly fluctuation is a natural part of our product cycle," says CEO Michael Chi. That's true enough, and the lumps get even more jarring when you consider Perfect World's small-cap scale. But profit margins are on the decline, and sales growth appears to have hit a modest plateau even if you calculate these metrics over a trailing-12-month period to smooth out the short-term bumps. Online games in China may be a hot sector, but Perfect World doesn't look like the best pick in the industry. Our Rule Breakers team has some stronger ideas for this market -- just grab a totally free 30-day trial pass to see what they are.

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At the time thisarticle was published Fool contributor Anders Bylund holds no position in any of the companies mentioned. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

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