Buy NetEase and Get Into the Game

by Robert Hsu | June 22, 2012 7:00 am

The hottest computer game in the world is the long-awaited Diablo 3 from Activision Blizzard (NASDAQ:ATVI[1]), based in Santa Monica, California. Diablo 3 set a new world record for being the fastest-selling PC game of all time since its worldwide release on May 15th.  In its first week, global sales reached a stratospheric 6.3 million copies worth a cool $370 million.

The first Diablo, which came out in 1996, was the most popular PC game of its time. Its sequel, Diablo 2, which was released in 2000, was also a highly acclaimed game with a large player following.  The two games sold a combined 11 million copies—among the best-selling PC games ever—and then development for Diablo 3 stopped abruptly in 2003 because of disagreements between the business and creative teams who worked on the project. It’s been 12 years since Diablo 2 came out, and Diablo 3 lured a whole generation of ex-gamers back to play.

This Diablo 3 phenomenon is also hitting Asian markets with full force. With the exception of Mainland China, where the game has yet to launch because of government red tape, the entire Asian gaming market has gone gaga over Diablo 3.

In Taiwan, for instance, there has been a sharp jump in hardware upgrades—faster computers, bigger flat screen displays, etc.—during the past month so players can enhance their Diablo 3 gaming experience.

Despite the long government approval process in Mainland China, Diablo 3 will launch later this year in the world’s largest online gaming market. Millions of Chinese gamers are anticipating the game’s launch, which will produce a tremendous windfall for NetEase (NASDAQ:NTES[2]), China’s leading online gaming company and Activision’s long-time partner there.

We have recommended NetEase in the past because of its success operating World of Warcraft for Activision. The stock did well in a difficult period for Chinese stocks and we sold it in March after it reached our target. Since then, with support from Activision, the company continued to execute well and business continued to grow.

In NetEase’s latest quarter, the company netted $1.14 per share, a 33% rise from its year-earlier profit and 4 cents better than expected. Revenue climbed 36% to $312.1 million, also beating estimates.

Although the company does not break down its revenues by product line, it is widely known that Activision‘s World of Warcraft games have been driving profits for NetEase. In its latest earnings conference call, NetEase CEO William Ding announced that the company has been working on modifying Diablo 3 for the Mainland Chinese market, and it should only be a matter of months or even weeks before the Chinese government approves the game for release in China.

I think now is a good time to buy shares of NTES in anticipation of Diablo 3′s release in China later this summer.

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