NetEase Inc.’s (NTES, Financial) upward momentum started in early 2013. Since then, the stock has managed to grow more than 700% and has displayed impressive performance this year as it reached an all-time high of $367 on Nov. 17. Shares of the Chinese internet company have fallen nearly 11% since then, but are still up approximately 50% year to date.
The company reported healthy third-quarter results on Nov. 15. It managed to beat estimates on both the top and bottom lines. Its revenue once again displayed significant strength, with a 35% surge to $1.88 billion. Its net income growth, however, continued to decline, with the earnings per share growing by merely 0.30%.
Investors' main concern is NetEase’s continuously growing operating expenses. The only challenge the company has not yet overcome is controlling its operating costs, which increased more than 35% during the quarter.
These expenses continue weighing down NetEase’s profit margins. Due to the weaker profits, the company was forced to cut its dividend from 83 cents to 72 cents per share.
While growing operating expenses is not a good sign, it does not appear to be a long-term issue. The company is strengthening its leading position in the domestic market while focusing on international expansion plans.
The company has shifted its focus from traditional online gaming to mobile gaming. As a result, it is facing several headwinds as monetizing mobile is more difficult to accomplish.
NetEase currently holds a dominant position in its home market but is also aggressively trying to expand its footprint in the international markets. The company recently launched its popular game, “Onmyoji,” in Korea and is preparing to launch the English version of the game in the U.S. and Canada.
Apart from this, “Crusaders of Light” has become one of the top grossing games in over 20 countries since its launch. The company also plans to launch several new game titles and expansion packs next year.
The Chinese mobile game market is enormous, so to benefit going forward, the company needs to continue building a dominant game portfolio while simultaneously advancing its advertising services and e-commerce segments.
Summing up
NetEase has performed amazingly well over the past several years and should continue rewarding investors for at least the next two to three years. The company has a secure position in the Chinese market, but its efforts to grow its presence in the international markets will reap fruitful results going forward.
NetEase has received buy ratings from several analysts, but the most significant bullish view is from Jialong Shi, a Wall Street analyst at Nomura, who upgraded the stock's price target to $428 per share.
The stock is down nearly 11% from its all-time high, representing a good entry point for investors. NetEase currently trades at a price-earnings (P/E) ratio of almost 22, considerably lower than the industry average. As a result, investors looking to profit from the growing gaming industry should consider adding this potential multi-bagger to their portfolio.
Disclosure: No positions in the stocks mentioned in this article.
