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Changyou.com Ltd Stock Downgraded (CYOU)

NEW YORK ( TheStreet) -- Changyou.com (Nasdaq: CYOU) has been downgraded by TheStreet Ratings from buy to hold. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and notable return on equity. However, as a counter to these strengths, we find that the stock has had a generally disappointing performance in the past year.

Highlights from the ratings report include:

  • The revenue growth came in higher than the industry average of 9.5%. Since the same quarter one year prior, revenues rose by 30.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • CYOU has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. To add to this, CYOU has a quick ratio of 2.49, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The gross profit margin for CHANGYOU.COM LTD is currently very high, coming in at 84.40%. Regardless of CYOU's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, CYOU's net profit margin of 47.70% significantly outperformed against the industry.
  • CYOU's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 46.03%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.

Changyou.com Limited develops and operates online games in the People's Republic of China. The company has a P/E ratio of 5.3, below the average computer software & services industry P/E ratio of 5.4 and below the S&P 500 P/E ratio of 17.7. Changyou.com has a market cap of $1.15 billion and is part of the technology sector and computer software & services industry. Shares are down 5.3% year to date as of the close of trading on Tuesday.

You can view the full Changyou.com Ratings Report or get investment ideas from our investment research center.

-- Written by a member of TheStreet Ratings Staff

TheStreet ratings do not represent the views of TheStreet's staff or its contributors. Ratings are established by computer based on metrics for performance (which includes growth, stock performance, efficiency and valuation) and risk (volatility and solvency). Companies with poor cash flow or high debt levels tend to earn lower ratings in our model.

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