NetEase Inc. (NTES, Financial) had a great year in 2016 as the stock was up nearly 20%. Moreover, the stock has displayed strong upward momentum since the beginning of 2017. Currently, the stock is up almost 35% year to date. The company has a robust business model in which it licenses popular game titles while also developing its own games.
NetEase delivered robust fourth-quarter results in February. For the quarter, the Chinese video game developer reported earnings per share of $4.30, surpassing estimates by a wide margin of 86 cents. On the other hand, the company’s revenue came in at $1.74 billion, again exceeding the consensus by $160 million.
Furthermore, that figure also represents a surge of whopping 53 percent compared to the same quarter in 2015. As a matter of fact, the company’s impressive revenue growth was primarily driven by the 62.8 percent surge in revenue generated from its online games segment.
Currently, China is the largest market for mobile gaming around the globe. Tencent (HKSE:00700, Financial) and NetEase account for the top two players in the mobile gaming industry. In late 2016, NetEase successfully dethroned Tencent as the top mobile publisher by revenue globally as its apps continue to gain in China.
NetEase managed to outperform Tencent with its two most popular games, card-battling “Onmyoji” as well as the multiplayer online adventure “Fantasy Westward Journey.”
In China, the mobile gaming market is growing at a rapid rate, suggesting the company’s gains in this area are a good sign. According to a report from Niko Partners, the leader in Asian Games Market Intelligence, Chinese domestic mobile games revenue is expected to grow to $8.3 billion in 2017.
To benefit from this rising trend, NetEase plans to introduce more than 100 mobile games this year, compared to just 40 mobile games in 2016. As a result, this belligerent tactic will certainly help the company cement its lead in China’s growing mobile gaming market.
In addition, Activision Blizzard (ATVI, Financial) renewed its agreement with NetEase in September. According to the agreement, the company will continue distributing games from Blizzard Entertainment, including "World of Warcraft," "Overwatch" and any new games developed over the course of the contract.
Summing up
NetEase’s upward momentum started in early 2013. Since then, the company has managed to reward shareholders with massive returns every year. Moreover, it is highly likely the company will continue to do so in the future as there is a positive outlook for the mobile gaming market.
In 2016, the company generated free cash flow of $2.2 billion and increased its dividend by 30%. The stock reflects a healthy valuation as it currently trades at a price-earnings (P/E) ratio of almost 22.
As an outcome, investors should continue holding the stock for enormous returns in the years ahead. Investors looking to initiate a position, however, should wait for a dip as it is currently trading around an all-time high.
Disclosure: No position in the stocks mentioned in this article.
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