Here's Why Kongzhong Shares Dropped, Then Recovered

Here's Why Kongzhong Shares Dropped, Then Recovered

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 KongZhong quickly plunged more than 10% Tuesday morning before recovering those losses to trade slightly in positive territory after the Chinese mobile and Internet game maker reported second-quarter results.

So what: Going into the report, the KongZhong stock had risen more than 30% over the past month alone, so it's easy to understand investors' initial apprehension after the company said net income actually declined 4.3% from the first quarter of 2013 to $6.51 million, or $0.16 per share. On an adjusted basis, net income also declined 12.1% from last quarter to $7.82 million, or $0.18 per diluted share. Meanwhile, revenue decreased 12.8% to $43.58 million over the same period.

However, the revenue number was actually in line with the company's own guidance of $43.5 million to $44.5 million. What's more, both earnings numbers exceeded the company's guidance for GAAP net income of $5.5 million to $6.5 million, and adjusted net income from $6.5 million to $7.5 million.

Now what: Going forward, KongZhong expects next quarter's revenue to be $43 million to $44 million, and net profit in the range of $0.5 million to $1.5 million as the company ramps up sales and marketing activities for the company's eight new smartphone and Internet games to be either commercially launched or entering beta testing during the second half of this year.

At 25 times last year's earnings and 17.2 times next year's estimates, the stock doesn't look particularly expensive given its long-term growth prospects in Chinese mobile gaming. That said, if shareholders want to see those earnings and revenue numbers return to growth, investors had better hope those new games catch on.

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