The Chinese internet market has been extremely strong so far in 2013. The sector, as represented by two focused ETFs—(CQQQ - ETF report) and (QQQC - ETF report)—has added close to 50% YTD, suggesting a bull market for this corner of the investing landscape.
This is largely because of some positive trends in this high beta sector, as the Chinese economy appears to be relatively back on track for the time being. However, while the trend might be quite strong in this segment, one has to wonder if one of the top performers, Perfect World (PWRD), can stay strong or if it is due for a fall.
Perfect World in Focus
Perfect World is a China-focused internet company that has had an incredible year. The company has seen its stock price surge by over 80% since the start of 2013, with the bulk of the gains coming in just the past few months.
The Beijing-based firm is best known as an online game developer and operator, focusing on online role playing games, including several 3D games. The firm was incorporated less than 10 years ago, but it has more than a dozen games and a market cap approaching one billion dollars, suggesting that it has seen unbelievable growth so far.
Yet despite the incredible growth lately, some are starting to believe that PWRD’s run is coming to an end. The company is now expected to see an earnings contraction of -19.4% this year, with earnings expected to be just $1.55/share compared to last year’s $1.92/share.
If that wasn’t enough, estimates have also been declining, pretty much across the board for PWRD. Three estimates have gone lower for the current year (compared to one higher) in the past sixty days, while three estimates have also gone down for the next year period as well in the same time frame.
Estimates have declined from $1.64/share for the full year period 90 days ago, to $1.55/share today, while investors have also seen a similar decline in the next year figures. Current quarter estimates have also tumbled, meaning that both the short and long term are not shaping up well for this once high flying company.
Plus, with its latest earnings date fast approaching, investors should be extra cautious. PWRD has missed estimates in three of the last four quarters, with an average surprise of -16.3% in the period, so it doesn’t exactly have a good track record.
Thanks to these factors, PWRD has earned itself a Zacks Rank #5 (Strong Sell), suggesting that its incredible run might be nearing an end. It also means that we are looking for the terrible estimate picture outlined above to dominate Perfect World’s investment story in the near term, and to drive the stock lower in the weeks ahead, so this could definitely be a stock to avoid in the near term.
For investors wishing to stay in the internet content space, there are a couple other, better ranked choices out there. In fact, the industry currently is in the top 25% so there are plenty of higher ranked picks in this part of the market.
In particular, Yandex (YNDX - Snapshot Report), Jiayaun.com , and Shanda Game (GAME), all have a top Zacks Rank #1 (Strong Buy), and are heavily exposed to emerging markets as well. Plus, all three have seen their ranks jump to the top spot (from a #2 last week), suggesting that now might be the time to look to these names over the soon-to-be struggling PWRD.
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