Morgan Stanely Downgraded Changyou.com to Underweight: Shares Expected to Underperform, First Quarterly Loss

In a report published Monday, Morgan Stanley analyst Timothy Chan downgraded Changyou.com Limited CYOU from Equal-weight to Underweight and lowered the price target from $40.00 to $26.00. Chan noted that although Changyou's investments will likely drive long-term growth, shares are likely to underperform near-term and will lead to the company's first quarterly loss since its IPO. The analyst commented on the softer momentum in legacy titles writing, “The outlook for TLBB and web games remains dim. The 1Q14 game sales guidance, down 4-7% QoQ and 1-4% YoY, was disappointing, despite the launch of the New TLBB expansion pack in late 2013. Its average monthly active game accounts were 25mn in 4Q13 (-19% QoQ and -34% YoY).” Changyou forecasted a non-GAAP net loss of $16-$22 million in first quarter of 2014 due to increased R&D spending and promotions. In the fourth quarter of 2013, the company reported that earnigs dropped 41% quarter-on-quarter and 42% year-on-year to $43 million. Morgan Stanley reduced sales forecast by 8-10% for 2014-2015. The analyst lowered 2014 EPS estimate from $5.71 to a loss of $0.37. Morgan Stanley reduced 2015 EPS estimate from $6.16 to $4.19. Shares of Changyou.com closed at $29.95 on Friday and shares have traded as low as $25.05, down 19.56%.