Amidst a challenging day with a 4.5% drop and a 3-month decline of 15.89%, NetEase Inc (NTES, Financial) presents a curious case for value investors with its current share price at $90.48. With an Earnings Per Share (EPS) of 6.47, the question arises: is NetEase modestly undervalued? This article delves into the financial nuances of NetEase, guided by the GF Value, to determine its true market value.
Company Overview
NetEase, which commenced as an internet portal service in 1997, has grown into a formidable online services provider in China. Its diverse offerings span across online/mobile games, cloud music, media, advertising, email, live streaming, online education, and e-commerce. Notably, NetEase develops and operates some of China's most popular PC client and mobile games and maintains partnerships with global gaming leaders such as Blizzard Entertainment and Mojang (a Microsoft subsidiary). Comparing the current stock price to the GF Value, estimated at $104.41, suggests that NetEase might be trading below its fair value, hinting at a potential undervaluation.
Understanding GF Value
The GF Value is a proprietary measure reflecting the intrinsic value of a stock, calculated from historical trading multiples, a GuruFocus adjustment factor based on past performance, and future business performance estimates. According to this metric, NetEase's stock appears modestly undervalued. This assessment is based on its current price compared to the GF Value, suggesting that the stock could present a favorable long-term investment opportunity due to its potential for higher future returns.
Financial Strength and Stability
Investing in a company with robust financial health reduces risks associated with financial distress. NetEase showcases a strong financial profile with a cash-to-debt ratio of 5.33, surpassing over half of its peers in the Interactive Media industry. This strength is further evidenced by its impressive financial strength rating of 8 out of 10.
Profitability and Growth Prospects
NetEase's ability to maintain profitability over the past decade is commendable, with significant revenue of $14.60 billion over the past 12 months and an operating margin of 26.7%, which stands well above the industry average. The company's consistent performance and strategic market positioning highlight its potential for sustained growth, supported by a 3-year average annual revenue growth rate of 9.8%.
Comparative Analysis of ROIC and WACC
Evaluating NetEase's efficiency in generating returns on invested capital (ROIC) relative to its cost of capital (WACC) offers insights into value creation. With an ROIC of 31.53% against a WACC of 7.97%, NetEase effectively generates value for its shareholders, underscoring its financial acumen and operational excellence.
Conclusion
Considering the robust financial health, strong profitability, and promising growth prospects, NetEase (NTES, Financial) indeed appears modestly undervalued. This assessment aligns with its current market performance and GF Value, making it an attractive investment for those seeking value in turbulent times. For a deeper dive into NetEase's financials and to explore other high-quality investment opportunities, visit NetEase's 30-Year Financials and 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.
