Game On! Shanda ready to surpass Netease

Asia. Gaming. Growth.

Put them together and it's no wonder that small companies like Shanda Interactive are continuing to cast a spell over gamers and investors alike. Shanda (SNDA) acquired Chengdu Aurora recently, and is aiming wide for more. If Shanda does wind up spending $260 million to acquire more small companies, I'd have to wonder who is really the mover and shaker in China gaming.

NetEase (NTES) recently announced a major share buyback plan. This is fine and good for shareholders and the company, but unless NTES has serious ammo in the pipeline, where will growth come from? Will Netease allow Shanda to catch up in market share?

It's possible, no doubt. NetEase has its fingers and toes in wireless VAS and advertising services within its network, and is still aiming for portal significance. (Sina is the clear portal leader in China, however.)

Shanda, meanwhile, is primarily focused on online gaming, period. Numbers are robust: 52% profit margin, 31% operating margin, 41% ROE and accelerating EPS since 2005. Quarterly revenue is up 55%, and earnings growth was in four digits.

With only 20 million shares in the float, the stock has rocketed. One year ago, SNDA traded at $13. It closed today at $32.82.

NetEase, meanwhile, traded at $21 a year ago and closed today's session at $18.84. NTES, which has a market cap of $2.3 billion, has 57% profit margin and 58% operating margin, as well as 42% ROE. However, quarterly earnings (4%) and earnings growth (2%) are a concern, and EPS is stagnant ($1.14 in '06, projected at $1.15 in '07 and $1.23 in '08).

Like NetEase, Shanda's cap is also $2.3 billion, but the numbers support SNDA.

While they battle out for Chinese turf, Nintendo clearly has plenty of running room, even after a major ramp up this year on the shoulders of its hot ticket, the Wii. Electronic Arts (EA) and Gamestop (GME) will fare well in a solid US economy, but until proven otherwise, NTDOY.PK is clearly the king of gaming growth stocks.

Disclaimer: Pupule Paul has no position in SNDA, NTES, NTDOY.PK, EA and GME.