Kongzhong Corporation (KONG) announced declining profit for the fourth quarter due to rising expenses. Its revenue exceeded market expectations, but its EPS missed the market consensus. Revenue has increased sequentially for the past two quarters. Although we are not optimistic about its prospects in the near term due to the tough WVAS operating environment, the company still has enough cash to look for another source of revenue growth in the future.
For the year 2007, its total revenues were $74.02 million, representing a 31% annual decrease. Gross margin was 50.7% for 2007, down from 55.4% for last year. Operating margin was -0.4% for 2007, down from 19.9% for 2006. Net income was $2.83 million. Diluted earnings per ADS were $0.08, representing an 89% annual decrease. The low P/B ratio of the stock can provide some support for its stock price.
Therefore, we are maintaining our Hold recommendation for the stock. Based on our estimate for fiscal year 2008 earnings per ADS, the stock is trading at 26.1x, which is slightly below that of the industry mean and its Chinese peers. Based on our estimate for fiscal year 2009 earnings per ADS, the stock is trading at 18.1x, which is below that of the industry mean. Using a P/E multiple of 19.2x our fiscal year 2008 earnings per ADS estimate of $0.26 yields a target price of $5.
Read the full analyst report on KONG.
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