NetEase (NTES, Financial) has been on a stellar run over the past few years as the company’s strong growth has propelled the stock to record-high levels. The company’s growth trend is still strong, which is why I think the stock is very attractive despite the recent run up.
In the most recent quarter, NetEase reported earnings per share of $3.67, $1.06 greater than the estimates, whereas revenue came in at $1.35 billion, $90 million more than the estimates. The company’s operations are basically segmented into three divisions, advertising, online gaming and e-commerce.
Most significantly, the company is well known in China for proposing multiplayer PC games as well as mobile games. Apart from PC games, NetEase also have a massive stake in the Chinese mobile gaming market. Moreover, the company’s advertising division is grounded on their portal, where it builds content and has a huge communal of everyday visitors.
The primary source of top-line generated from this segment comes from advertising and sponsored content. Moving on to the last segment, the company proposes a wide range of free as well as freemium services, comprising e-mail and several other online communications.
As a matter of fact, NetEase and Tencent (HKSE:00700, Financial) are gradually increasing their stakes in the Chinese mobile games market, with an overall market share of approximately 70%. With time, the company has tapered the gap with Tencent.
However, considering the failing market conditions, both the companies are using almost identical tactics of diversification as well as mergers with their associated game producers. Moreover, as per data obtained from Sina Technology, mobile games accounted for approximately 50% of the Chinese online game market in the first half of 2016.
As an outcome, NetEase carries on leading in the mobile game market, which is still growing at a healthy rate. While NetEase and Tencent are gradually gaining advantages in the mobile game market, several other companies are facing the severe problem of declining revenue.
Apart from all this, the company detailed that it is now focusing on the virtual reality and augmented reality markets, which can be very lucrative if tackled correctly. The company is partnering with Google (GOOG, Financial) to build games for their AR platform. Not only this, the company is also partnering with other VR content producers in order to attain a robust position in the gradually rising AR-VR market.
Final words
NetEase has many options to sustain its strong growth rate. Due to the company’s strong expected growth, I think the stock is a great buy despite it being near its record-high levels.
Disclosure: No position.
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