After Blowout Q4 earnings drive NetEase Inc stock to all-time highs, is NTES stock headed for much higher grounds?
Shares of Hangzhou, China-based NetEase Inc (NASDAQ:NTES) popped 14% in the Feb 16th trading session after the company reported stellar Q4 and full-year 2016 earnings on Feb 15th after market close. The Chinese online gaming giant delivered an EPS of $4.30 on revenues of $1.74B beating EPS estimates by $0.86 and revenue estimates by $16oM. NetEase's revenue grew by an impressive 53.1% YoY for Q4 and 67.7% for the full year 2016. On the back of these strong numbers, NTES stock closed at an all-time high of $298.73 in yesterday's trading session. NTES stock might have gone up very high too soon. There could be a correction around the corner but still NTES stock is a great long-term proposition with much more upside left. Here's why.
NetEase Is Experiencing Growth In All Its Key Divisions.
Gaming altogether is at a different level in China and NetEase is at the crest of the gaming industry in China. Flagship PC and mobile games were one of the key growth drivers for the internet company as gaming revenue surged 63%YoY to $1.24B in Q4. 74% of the revenues came from online gaming. NetEase management attributed its strong performance to 83% growth in the mobile gaming segment. Advertising services segment revenue in Q4 grew by 9.2% YoY while its e-mail, e-commerce and others segment saw a growth of 38.2% YoY. Onward Choi, NetEase Acting Chief Financial Officer, expressed confidence in further growth opportunities in its e-commerce segment. To quote him "This business is still in its development stage, and we believe there is a substantial opportunity here as this platform matures". NetEase plans to continue its mobile gaming dominance by releasing over 100 mobile games in 2017 compared to 40 mobile game titles it released in 2016. One could expect the strong growth in the mobile gaming revenues continue.
NetEase Is Set To Rule In 2017.
NetEase saw its revenue increase by 67.4% YoY in 2016 to $5.5B. Net income was up to $1.7B rising 73% from 2015. NetEase management doesn't provide any official guidance but they did mention in their earnings call that they expect much stronger growth in 2017. One could rightly expect them to do so considering that they have some blockbuster game releases coming up in 2017. NetEase is expected to bring both PC and mobile versions of the highly anticipated and globally acclaimed game Minecraft to Chinese gamers. Also, NetEase's popular mobile game Onmyoji which was released in September will be launched in international markets including Japan, Canada, Europe and the United States later this year.
NetEase with its focus on mobile is well positioned to capture the mobile advertising services business in China. As mentioned in the earnings call, its advertising business is in for steady growth. The Mobile News App will be a key growth driver. Also, the games released in partnership with Activision Blizzard (NASDAQ:ATVI) (Blizzard Entertainments) have been a huge hit. To quote from the earnings call: "Overwatch also established a new sales record in the category of buy-to-play PC-client games in mainland China, with more than five million copies sold by the end of December since its late May release." In 2017, expansion packs of existing games and some new ones are expected which could also become a huge hit among the Chinese gamers. This really bodes well for NetEase since licensed games such as Blizzard Entertainment's Overwatch was also one of the prime reasons for the growth in online game services gross profit in 2016.
Final Words: NetEase Inc Stock Is A Winner
NetEase Inc generated a healthy cash flow of $2.2B in 2016 and had a cash and short-term investments of $5.3B at the end of the year 2016 much higher than the previous year. NetEase also announced a dividend of $1.01 per share for the fourth quarter, an increase of nearly 30% from its previous number. The company will also continue its US$1 billion 12-month share repurchase program. Investors should also note that NetEase is making strong attempts capture the AR/VR market as well, with its Twilight Pioneers game on Google's Daydream VR platform. Also, the gaming giant had embedded in some AR features in its popular Onmyoji game has got a good response. The potential in VR/AR gaming market is still untapped and offers huge growth potential for NetEase.
NetEase may still gain more from the booming mobile market as there is speculation that the online gaming giant could partner with Google to launch their Play app store and help the search giant to return to China. This partnership, if it goes through, would be very beneficial to both the parties. NetEase Inc has so many factors going for it and that makes NTES stock to be in our top stock picks. NTES stock has delivered a cumulative return of more than 500% since it made it to our top stock picks in Jan 2011. To conclude, we think NTES is a good option for long-term investors. Investors should add NTES stock to their portfolios on any pullbacks.
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