NetEase Inc (ADR) (NASDAQ:NTES) is one of China’s largest diversified online companies, with a market cap of more than $42 billion.
Baidu Inc (ADR) (NASDAQ:BIDU) is about 50% larger and Tencent Holdings Ltd (OTCMKTS:TCEHY) is almost an order of magnitude larger, as is Alibaba Group Holding Ltd (NYSE:BABA). But, they all operate in various sectors of the market.
But, the mainland Chinese market is massive, so there’s plenty of room for a lot of players. The Chinese population is nearly four times the size of the U.S. population, but its economy is growing roughly six times faster than that of the U.S. This means it would take the American economy six years to grow as fast as China does in one year.
The crazy thing is, its 6.9% GDP growth in the first quarter, compared to Q1 U.S. GDP growth of 1.2% (up from 0.7%), was on the slow end for China. Its 6.7% growth in 2016 was the slowest in China over the past 26 years.
But, China is starting to grow again after its slowdown.
Now, add in the fact that NTES stock is in the perfect spot, regardless of 6%, 7% or 12% annual growth. You see, NetEase has diversified its operations so that revenue comes from three different sources. The company’s revenue stream is derived from its Advertising Services, Email and E-commerce and Online Gaming divisions.
The latter is generally not found outside of the Chinese marketplace, though. Some of the bigger social media companies and online content providers also have gaming divisions that are usually an incredibly profitable part of their business models.
NetEase Stock Will Benefit From its Niche
In NTES’ case, its massively multi-player online role-playing games (MMORPGs), which are growing in popularity, are the engine of its business model and the force behind NetEase stock. And, the beauty of these games is they’re not expensive.
In a relatively young society with a growing middle class, people don’t tend to rush out and buy big-ticket items with the extra yuan that come their way. Instead, they buy a name brand shoe or a designer dress, a nicer phone, or a few extra games to play with friends.
China is also a society that is transitioning from a largely spread out, agrarian population to one where mega-cities are popping up all over. This movement of people means that new city dwellers are looking for some kind of connection with people like them, as well as the people they left behind.
And, NTES’ most recent Q1 numbers bear this out.
Revenue for the quarter was up 72% compared to the same quarter last year. The gaming division was up 78%, advertising was up 13% and email and e-commerce was up 63%.
NTES stock is up 43% year to date, with plenty more where that came from.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
