NCTY’s Cash Hoard
I picked up some shares of The9 (NASDAQ: NCTY) at $7.54 today purely based on their balance sheet and games pipeline. I, myself, am an avid gamer so I’m very well-versed in the world of MMORPGs (Massive Multiplayer Online Role Playing Games). NCTY, who specializes in operating MMORPG’s in China, got beat up badly when they lost the license to the insanely popular World of Warcraft MMORPG in China. WoW accounted for a HUGE percentage of their revenue and profit and thus, they’ve lost money in the last 2 quarters.
However, they do have quite a few games in their pipeline including FIFA Online which should do very well.
With that said, an even more compelling reason for me to buy NCTY was their balance sheet. Boy do they have a hoard of cash on hand — about $275 million. Strangely enough, according to their latest quarterly earnings report (which reported about 25 million shares outstanding), their market cap stands at about $188 million which is much lower than their total cash on hand. Their book value is over $13 per share and yet they’re only trading at $7.50.
Yes, it’s likely they will continue to lose money in the next couple of quarters, but it appears much of the damage from losing the WoW license has been done. There’s some speculation that NCTY lost the WoW license due to their pact and minority investment from Electronic Arts (that’s probably the reason they were able to get the FIFA Online license) and we all know there’s not much love between EA and Activision Blizzard (ATVI).
In any case, even if NCTY loses money in the next few quarters, I think they’ll turn the corner soon. They have a few very interesting games in their pipeline which should do very well. And one last note — these MMORPG’s have insanely high margins so it’s not inconceivable that a single “hit” game could make an entire company profitable (WoW is a perfect example). At $7.50, NCTY does look very cheap and appears to be a worthwhile gamble.
