The growing preference for enhanced gaming experience is leading gaming companies to better opportunities for improved operational performance. One of China’s leading internet and online games service providers, NetEase (NTES, Financial), reported terrific results for the second quarter. With good results, NetEase is confident of better results in the future as well. Management is seeing many positive signs such as growing traction across its mobile and online games, advertising and e-commerce. The company thinks that these factors will help it post better numbers on the board and will support its dynamic growth strategy. Let us have a look at NetEase’s underlying business.
Quarterly results and beyond
NetEase’s quarterly revenue improved by 17.2%. Its revenue from advertising services increased by 42.9% and revenues from e-mail, e-commerce and other segments increased by 201.5%. The impressive results by the company managed to impress the investors and soon after NetEase posted its results, the stock 5d up and touched 85.50 but felt little short of its all time high of 86.75.
NetEase is on fire with good numbers on the board. The company is focusing on improving its profitability. It is focusing on various aspects to make better impact on the market. It is seeing great opportunities in China and is striving hard to capture China’s online market place. NetEase is pleased by the changing trends in online gaming. With the mobile usage accelerating at an impressive pace, NetEase is thinking to gain much market share in the future. With many innovations in line NetEase is focused on enhancing quality and comprehensive user experience.
A strong pipeline
To further attract customers, NetEase has introduced expansion packs of some exciting games such as Ghost II, Tianxia III, Legend of Fairy and Kung Fu Master. Moreover, NetEase is also continuing to introduce flash story lines and characters to see more user engagement. Further, by the end of this fiscal year, NetEase is aiming at introducing expansion packs and updates of its games.
NetEase is focusing on strengthening its product portfolio by adding two new games. The company has great expectations from its to-be-launched first person shooter game namely Crisis 2015 and Revelation which is its 3-D Oriental fantasy MMORPG. In the mobile gaming segment as well, NetEase is continuing to introduce new and exciting mobile games. It is about to release two of its licensed mobile games namely Must Die 2 and KONAMI World Soccer Collections. With such moves NetEase is aiming at diversifying its mobile offering and improve revenue contributions for this accelerating mobile platform.
The integration of NetEase’s mobile games with YiChat has brought bright opportunities for the company. These opportunities are taking shape through its social networking platform. To further attract customers, NetEase is launching other key services such as an online payment system to its YiChat users in future.
In addition, NetEase is planning to continue fostering its growth both organically and by exploring overseas licensing and expansion opportunities which will help it to improve its traditional online and mobile games.
Conclusion
Shifting focus to the fundamentals, NetEase is cheap with trailing P/E of 15.04 but the forward P/E of just 2.04 shows that the company’s earnings are growing at disappointing levels. But in long term the company’s earnings are growing at a CAGR of 14.42% which is impressive and which indicates that stock can be a good long term holding in future. This is quite close to the industry average of 16.15% for the next five years. Considering all these facts, it can be noted that the stock has impressive earnings in the long term while in the short term the earnings are not moving in a way to attract the investors. Investors seeking long term gains should definitely include NetEase in their portfolio.
