Stock (Symbol) |
Netease (NTES) |
Stock Price |
$284 |
Sector |
| Technology |
Data is as of |
| April 2, 2017 |
Expected to Report |
| May 9 – 15 |
Company Description |
 NetEase, Inc. (NetEase) is a technology company. The Company operates an interactive online community in China and is a provider of Chinese language content and services through its online games, Internet media, e-mail, e-commerce and other businesses. The Company operates through three segments: Online Game Services; Advertising Services, and E-mail, E-commerce and Others. Its online games business primarily focuses on offering personal computer (PC)-client massively multi-player online role-playing games (PC-client MMORPGs), as well as mobile games to the Chinese market. Its online advertising offerings include banner advertising, direct e-mail, sponsored special events, games, contests and other activities. It offers free and fee-based premium e-mail services to its individual users and corporate users. Source: Thomson Financial |
Sharek’s Take |
 Netease showed investors it’s Master of the Universe with a blockbuster qtr in which the company delivered 64% profit growth and crushed estimates of 37% growth. Netease is a monster in China’s online gaming community, with games for both PCs and mobile devices and hot titles such as World of Warcraft and Minecraft. Although NTES gets a majority of revenue from games, the company also runs one of China’s most popular web portals in 163.com, the top news app on iOS platforms, and the leading email service in China. Online games account for 74% of revenue (sales rose 62% last qtr, yoy), Email & e-commerce is 20% (+38%), and Advertising services are 5% of sales (+9%). Although Netease is primarily a gaming company — and that may not seem serious — management makes sound decisions with its profits including share buybacks and hefty dividends. In November management announced a buyback program to repurchase up to $1 billion in stock over the next year (around 3% of shares) and the company pays a qtrly dividend of 25% of the anticipated profits for the coming qtr. This qtr the dividend is $1.01 which means NTES thinks it will make $4 in profits this qtr which would be growth of 43% from a year ago. NTES has an Est. LTG of 28%, which is up from 23% last qtr, but is still too low in my opinion. Profits are growing 65% right now! Plus, this stock has a low P/E of only 18, making it the biggest bargain in the stock market. My Fair Value is a reasonable 25x earnings which is $389 this year and $441 next year. Since profit estimates have been jumping, these may not be high enough. |
One Year Chart |
 Last qtr NTES delivered sales growth of 43% and profit growth of 64% as both crushed analyst estimates. The company had only beaten the street by a little in the prior qtr, which probably caused the selloff late last year that you can see in the one-year chart. This time the stock surged after earnings, but has since stalled. I’m surprised by that since the P/E is only 18. Afterwards analysts upped 2017 profit estimates from $14.60 to $15.56 and 2018’s were raised from $16.78 to $17.63. Qtrly profit Estimates jumped across the board and are now 43%, 31%, 30% and 0% (this last one needs time to rise). The Est. LTG made a surge from 23% to 28% which is rare to see. |
Fair Value |
 NTES has had an amazing track record in regards to growing profits, with 27% compounded growth for the decade and record profits each and every year. Still, the stock was only deserving of a teens P/E. It’s unreal how unappreciated this stock is! I really think the P/E should be 35, but I’d settle for 25 which still gives the stock huge upside. Also, annual profit estimates are rising. Using pen-and-paper analysis, hypothetically NTES could make $25 in 2019 (current estimate is $21.22) and if it gets a P/E of 23 the stock could double in two-to-three years. |
Bottom Line |
 Netease is one fire right now, but Chinese Internet stocks have a history of being quite volatile so we have to be cautious. There’s been huge selloffs in this sector throughout the years and if you’re overweight the sector (which right now you should be) you have to be nimble and lighten up at times. Even though the stock looks extended in the ten-year chart, the low P/E still makes it incredibly undervalued. NTES ranks 2nd in both the Growth Portfolio and Aggressive Growth Portfolio Power Rankings. It’s one of the best stocks of our generation. |
Power Rankings |
Growth Stock Portfolio
2 of 34Aggressive Growth Portfolio 2 of 18Conservative Stock Portfolio N/A |
