Thursday, March 26, 2009

Shanda (NASDAQ:SNDA): Downgraded to Sell at Roth

Roth is out downgrading Shanda (NASDAQ:SNDA) to Sell from Hold with a $30 tgt noting the shares hit a new 52-week high yesterday and are now up +87% from their Dec-08 lows. Firm believes the stock is ahead of itself at current levels and think there are better risk to reward opportunities in the sector.

Roth's thesis. Their downgrade is based upon the following: 1) overly optimist expectations for AION 2) operating margin pressure in 2H09 3) growing competition and 4) valuation.

AION - sell the hype. Shanda will begin limited-CB for AION today, with unlimited-CB scheduled to begin on Apr-8. We advise investors to use the recent share price appreciation - largely due to hype surrounding AION launch (and co-op announcements) - to take profits. Four key risk areas for this game/Shanda include: NcSoft's lack of a track record in China, potential hacker problems, restrictive HW requirements, and license fees.

Operating margin pressure. They believe Shanda will face operating margin pressure in 2H09 and will be unable to maintain OM's above 40% despite incremental new revenue. This is due to lower margin revenue associated with AION and increasing OpEx related to the company's expansionary efforts and new game releases.

Growing competition. Firm believes Tencent will overtake Shanda as the largest online game operator in China either this year or next year. Additionally, they believe growing competition from a number of smaller online game companies will further erode Shanda's market share position.

Premium valuation. Shares of Shanda are now trading at 12.4x and 10.9x FY09 and FY10 estimates, respectively. This represents a 25% premium to the comp group, which they believe is unwarranted. The $30price target is based on 9.5x FY09 EPS estimate of $3.17.

Notablecalls: Note that RBS is also out with a Sell call on the name today saying Shanda lacks a blockbuster game and views shares as overvalued.

Should make the latest buyers panic and others think about taking some profits. Sub-$38 anyone?

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