How High Will NetEase Stock Go?

NetEase (NASDAQ:NTES) has grown into one of China’s premier technology companies and now encompasses everything from gaming to e-commerce.

The online gaming segment of the business has been a runaway success. NetEase created and released a long list of popular titles, including World of Warcraft and Hearthstone, that attracted players throughout China and around the world, and it made a practice of partnering with other accomplished gaming firms to reach broader audiences.

In e-commerce, NetEase runs Yanxuan, a platform that offers everything from home goods to electronics, and even food and personal care. What stands out about the e-commerce platform, at least as far as consumers are concerned, is the low prices, but equally clean designs and minimalism.

For investors, the suite of businesses under the NetEast corporate umbrella make it an intriguing play. Online gaming and e-commerce are two primary divisions but so too does the firm offer music streaming, online education, cloud services, news, and even ad and email services.

So, the question is what does the future hold for the conglomerate and will the combination of business fuel a higher share price?

Mobile Gaming Market Is Key Growth Driver

Where NetEase shines brightly is that, in the fast-growing market of mobile gaming, users are very loyal to NetEase.

In part that’s because of the flagship smartphone game titles like Fantasy Westward Journey, Identity V, and Knives Out. Remarkably, each one of them features millions of players.

Take Fantasy Westward Journey, for example, one of the leading mobile games in China that has regularly been at the top of the highest download and highest-grossing lists.

It’s clear that NetEase has an acute pulse on  the behavior and interests of its users and has mastered the art and science of keeping players engaged with its products. 

A core part of the firm’s competitive advantage has also stemmed from connecting with other major brands in the space, such as a partnership with Blizzard Entertainment , the maker of World of Warcraft and Overwatch in China.

These connections lead to a lot of overlap and cross-selling that enriches the company’s product line and heightens popularity within the gaming community. 

Speaking of which, the number of mobile users in China is growing fast and, better yet, China’s population has more disposable income per capita than ever, creating a fertile ground for NetEase to grow. 

According to a report from last year, the number of Chinese residents playing video games hit record highs, making China the world’s biggest gaming market, and that rate of growth is expected to continue.

China’s mobile games market is projected to generate revenue of $34.66 billion this year and grow at a CAGR of 5.8% to $41.05 billion by 2027.

In short, a variety of factors have combined to make NetEase a force to reckon with China’s expanding and highly competitive mobile gaming market.

As a result of this success, the gaming division is the most lucrative segment for NetEase. It makes a substantial contribution to the company’s total revenue. Net revenue from games and related value-added services came in at RMB21.5 billion ($3.0 billion) in the first quarter of 2024, an increase of 7% compared with the prior year period.

Industry analysts consider this consistent growth to be evidence of the firm’s efficient monetization of its gaming products.

NetEase’s total net revenue reached RMB 26.9 billion ($3.7 billion) in the first quarter of 2024, marking a 7.2% increase compared to the same period in 2023. Net income attributable to shareholders was RMB 7.6 billion ($1.1 billion), up from RMB 6.8 billion in the first quarter of 2023.

NetEase Is Growing its E-commerce Channels

Though NetEase’s gaming segment generates the lion’s share of its total revenue, the company is still developing a diverse mix of digital products and services.

For example, NetEase operated Kaola, which was acquired by Alibaba in 2019. It still owns and operates Yanxuan, which was established in 2016 and is well known for selling high-quality private-label products at bargain-basement prices. 

Management appears dedicated to further improving the e-commerce division, whether through improved logistics capacity via increasing its network of warehouses, or redesigning its entire supply chain for faster delivery times and better inventory management.

These upgrades have been met with approval from customers, and NetEase’s e-commerce platforms have seen growing user engagement.

Rising internet adoption, well-developed logistic infrastructure, and enhanced consumer purchasing power have created stellar conditions for NetEase’s e-commerce segment to prosper. 

How High Will NetEase Stock Go?

NetEase stock is likely to go as high as $117.28 per share according to 33 analysts whose consensus translates to 49.5% upside opportunity.

Though NetEase has delivered strong top-line results and solid bottom-line profits, investors have been underwhelmed by the financials. The share price dropped by 15% this year and is trading near a 12-month low.

Astonishingly that means this high growth stock now pays out a dividend yield of 3.1% with a relatively stable 41% payout ratio. That dividend has been on an uptrend over the past 3 years as far as payouts are concerned, signaling management’s confidence in it.

Another bullish sign is the price-to-earnings ratio of just 12.5x suggests it’s trading at bargain levels, especially given it still produces $3.9 billion of EBIT and has about $17.8 billion in cash and short-term investments on the balance sheet to withstand forceful headwinds.

With a market cap of just over $51 billion and generating annual sales of $14.5 billion, it’s hard not to find NetEase as anything other than a compelling value play now.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.