NetEase Inc (ADR) (NASDAQ:NTES) is one of China’s top online gaming companies, especially in the hottest trend — massively multiplayer online role playing games (MMORPG).
And as is typical of many Chinese internet firms, it also has other divisions that help generate a significant amount revenue outside the gaming world as well. It has nearly 1 billion email users and has a respectable advertising and e-commerce division as well.
Unlike its chief Chinese rival, Tencent Holdings Ltd (OTCMKTS:TCEHY), NetEase is gaining a large share of mobile MMORPG market, arguably the hottest sector in gaming. And even if you compare NetEase to its American compatriots Activision Blizzard, Inc. (NASDAQ:ATVI) and Electronic Arts Inc. (NASDAQ:EA), it has been performing like its U.S. cousins. NTES stock is up 46% in the past 12 months, compared to EA and ATVI’s 53% return over the same period.
Tencent is 10x the size, by market capitalization, of NetEase but that isn’t a reason to shy away from this $39 billion company. On the contrary, NTES is just beginning to hit its stride and is still under the radar for many investors in the West.
In Q1, NetEase reported gaming net revenue was up 78% compared to the same quarter a year earlier. And its email and e-commerce businesses were up 68% over the same time period.
Yet the stock doesn’t reflect these impressive gains, which is good for anyone interested in the stock. It means even after its run, you’re still buying in at a discount, since NTES stock is trading at a price-to-earnings ratio of only 20.
NetEase Going Forward
Also remember that China has been slogging through a recession and gaming is a cheap form of entertainment, especially for the younger demographic. And the MMORPG platform means all these young professionals that have moved to the big city can play with their new friends as well as their old ones back home. There are few technologies that are as transformative in the new online world.
Given that while NTES is game-driven — about 65% of its revenue is derived from gaming — the bigger its email business grows and its games business grows just multiplies the opportunities to expand its e-commerce and advertising businesses. Look no further than Facebook Inc (NASDAQ:FB) to see how advertising can become a game changer for a social media business.
As the Chinese economy revives, there’s little doubt that MMORPG will continue its rise, since this type of gaming is just as much about developing a social network as it is about playing a game. And because gaming is relatively new in China compared to the West, the growth potential on all fronts is expanding rapidly.
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.