Why Changyou Shares Got Crushed

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 Chinese online gaming operator Changyou.com plummeted 19% today after its quarterly results and outlook disappointed Wall Street.

So what: The stock has soared over the past year on a string of better-than-expected quarters, but today's Q2 revenue miss -- $182.4 million versus the average estimate of $183.4 million -- coupled with downbeat guidance for the Q3 is forcing Mr. Market to quickly sober up. And while Changyou's profit of $75.2 million managed to top estimates, gross margin during the quarter slipped 100 basis points, suggesting that the super-high earnings growth is getting more expensive to sustain.

Management now sees third-quarter EPS of $1.33-$1.38 on revenue of $180 million-$186 million, well below the consensus of $1.48 and $191 million. "With an array of new games planned for the PC, Web and mobile and the capabilities we have built over the years in game development, operation, marketing and distribution, we believe we are positioned to succeed over the long-term," CEO Tao Wang reassured investors. More important, with the stock now off about 20% from its 52-week highs and trading at a forward P/E of around 6, Mr. Market might finally be providing a window to buy into that bullishness.

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The article Why Changyou Shares Got Crushed originally appeared on Fool.com.

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