NetEase Inc (NTES, Financial) experienced a daily loss of 4.5%, contributing to a three-month decline of 15.91%. Despite these figures, the company's Earnings Per Share (EPS) stands at 6.47. This analysis seeks to determine if NetEase is indeed modestly undervalued, as suggested by its current market performance juxtaposed against its intrinsic valuation.
Company Overview
Founded in 1997, NetEase is a frontrunner in China's online services sector, providing a variety of services such as online/mobile games, cloud music, and e-commerce. Notably, it develops and operates some of China's most popular PC and mobile games, and collaborates with top global game developers like Blizzard Entertainment and Mojang. With a current stock price of $90.48 and a GF Value of $107.16, our valuation analysis will delve deeper into whether NetEase stands as a smart investment.
Understanding GF Value
The GF Value is an exclusive measure that determines the intrinsic value of a stock based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. For NetEase, the GF Value suggests a fair value of $107.16 per share, indicating that the stock is modestly undervalued. This valuation implies that long-term returns could potentially exceed the company's business growth, making it an attractive option for investors.
Financial Strength
Investing in companies with robust financial health reduces the risk of permanent capital loss. NetEase boasts a cash-to-debt ratio of 6.19, ranking favorably within its industry. This strong balance sheet earns NetEase a financial strength rating of 8 out of 10 from GuruFocus.
Profitability and Growth
Profitability is a crucial factor for investment safety. NetEase has maintained profitability over the past decade with an impressive operating margin of 26.79%, outperforming 86.7% of its industry peers. The company's revenue growth rate over the past three years was 9.8%, with an EBITDA growth rate of 17.3%, signaling strong potential for future value creation.
ROIC vs WACC
An effective way to assess a company's profitability is to compare its Return on Invested Capital (ROIC) against its Weighted Average Cost of Capital (WACC). NetEase's ROIC is an impressive 31.08, significantly higher than its WACC of 7.97, indicating efficient capital management.
Conclusion
Overall, the evidence suggests that NetEase (NTES, Financial) is modestly undervalued. The company's strong financial health and profitability, coupled with its growth potential, make it an attractive prospect for value investors. For a deeper dive into NetEase's financials and to explore more about the stock, visit its 30-Year Financials here.
To discover other high-quality companies that may deliver above-average returns, check out the GuruFocus High Quality Low Capex Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
