Will Changyou.com's (CYOU) Q3 Earnings Post A Surprise?

Changyou.com Limited (NASDAQ:CYOU) is set to report third-quarter 2016 results on Oct 24. Last quarter, the company delivered a positive earnings surprise of 10.71%. Also, the company delivered positive earnings surprises in the last four quarters, bringing the average to 59.66%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Changyou has gained recognition for its offerings like Tian Long Ba Bu (TLBB) and Blade Online. However, these days, the popularity of PC games is dwindling because of rapid migration to mobile games. To keep up with the change, Changyou has stepped up its R&D efforts to develop more innovative and user friendly mobile games, leveraging its own huge PC games user base. The company has said that it plans to launch TLBB mobile by the end of 2016 or early 2017.

Changyou is also concentrating on e-sports. E-sports are fast emerging as a lucrative business opportunity. The company is also dabbling in Virtual Reality. In the last reported quarter, Changyou announced that it has two VR projects in the works.

A few months back, Changyou and Tencent struck a licensing deal for TLBB mobile games. The company said that it was betting big on Tencent’s distribution capabilities along with its research in hard core games to bring erstwhile PC game players to mobile.

However, Changyou is facing operational challenges from the ongoing transition. Also, sluggish online game and advertising businesses continue to hurt margins. Increasing competition remains an added concern.

For the third quarter of 2016, Changyou expects total revenue to be in the band of $125 million to $135 million. Online gaming revenues are projected between $90 million and $100 million. Non-GAAP earnings are expected to be in the range of 47 to 56 cents.

Earnings Whispers

Our proven model does not conclusively show that Changyou is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Changyou currently has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 47 cents.

Zacks Rank: Changyou has a Zacks Rank #3. Though Zacks Rank #1, 2 or 3 increases the predictive power of ESP, the company’s 0.00% ESP makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are a few stocks that, as per our model, have the right combination of elements to post an earnings beat this quarter:

Amazon.com, Inc. (NASDAQ:AMZN) with an Earnings ESP of +6.98% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Apple Inc. (NASDAQ:AAPL) with an Earnings ESP of +1.21% and a Zacks Rank #2.

Moody’s Corp. (NYSE:MCO) with an Earnings ESP of +1.70% and a Zacks Rank #2.

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