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Watch Out For NetEase's Growth Story!

August 23, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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The first half of 2014 wasn't a good one for Chinese gaming company NetEase (NTES). The stock touched an all-time low of $63.35 in the month of March and also underperformed the NASDAQ Composite index in the first six months of the year. However, the stock has recovered fantastically from the downward spiral and it touched an all-time high at $86.75 in the month of July. NetEase recently reported its second quarter results wherein it secured an earnings beat as revenue surged from the nongaming segments. The Beijing-based company wants to pivot from a heavy focus on PC games to mobile gaming. NetEase launched its first three mobile games last year, and new features in the works include adding social networking functions to mobile games through the company's YiChat service.

Company’s status on mobile gaming

In the earnings call, the management of the company did not give out actual numbers for its mobile gaming initiatives but Mr Onward Choi, the Acting Chief Financial Officer of the company did mention that there had been a very minimum growth in terms of the revenue contributions from our mobile games initiatives. In spite of launching two new licensed mobile games i.e Ninja Must Die 2 and KONAMI Soccer World Collections, the company failed to achieve expected revenue growth.

As more and more gamers are shifting to high graphic mobile games, it becomes significant for NetEase to establish prolonged traction in mobile gaming in order to secure the confidence of investors. The declining user base of Activision Blizzard’s “World of Warcraft” game of which NetEase holds a lucrative exclusive licence has pushed the company to focus on mobile gaming apart from its massively multi-player online role-playing games (MMPORG) in China. As per reports, NetEase is set to introduce two new games before the year-end. The first one is a person shooter game “Crisis 2015” and second would be “Revelation”, a 3D oriental fantasy MMORPG. The initial user feedback received by the company from small group testing of Revelation has been positive and it is already are planning to begin second round testing in late August.

In nutshell, it is highly necessary that NetEase converts its mobile gaming portfolio into a growth driver in the near future. Already, the company has exhibited reasonable performance in this respect but has not quite achieved the growth rate expected by investors and analysts. Also, the integration of some of company’s mobile games with YiChat service (an equivalent and a potential competitor to WeChat messaging service) is in alignment with company’s vision to present YiChat as a holistic social app. As such, NetEase has focused on integrating unique and innovative social networking functions into YiChat like Crowd Ask and Rideshare to help users stay connected and bring ease and simplicity to their mobile lifestyle.

The partnership with Activision Blizzard

Besides the development in the mobile gaming portfolio, NetEase is also looking to continue capitalizing on its partnership with Activision Blizzard and the two companies are still working to bring the localized versions of Diablo III and Heroes of the Storm to China. Also, Activision is investing credible efforts to infuse some momentum in its WoW franchise. Slated to be released in December, there are good reasons to expect Warlords of Draenor to spark a generous response based on the fact that preorder sales are running strong at over 1.5 million to date. Therefore, it is not prudent to think that the best days of the WoW franchise are behind it because as per data the sales are up and the game is still quite profitable and Warlords expansion should pump back life into subscriber growth in the next year.

Takeaway

The mobile and online gaming market is expected to grow at a compound annual rate of 23.6% till 2017, generating $60 billion in revenue, according to Digi-Capital. Clearly, the opportunity is big, and NetEase is trying to capture as much share of the market as possible. It has already created a strong mobile gaming portfolio, and as it makes further progress in this segment, its financial performance should improve.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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