NetEase: Portal to Profits?

07/12/2016 10:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

This stock—a Chinese web portal that does enormous business in the online game business—has been featured often in our Top Ten rankings, racking up 16 appearances, explains Mike Cintolo, editor of Cabot Top Ten Trader.

The reason is simple: NetEase (NTES) has a dominant position in Chinese online games, on both PCs and mobile devices.

It offers a huge lineup of games, both licensed (like World of Warcraft, which is exclusively licensed to NetEase from Blizzard Entertainment) and developed in house (like the hugely popular Fantasy Westward Journey).

NetEase is also the largest free email provider in China, and that service, plus mobile apps, social interaction platforms and e-commerce services, gives the company a huge base for ad sales.

Revenue growth has soared from 15% in 2013 to 90% in 2015, with more than three-quarters of 2015 revenue coming from online game services.

NetEase’s Q1 results kept the ball rolling with 108% revenue growth and 79% earnings growth. Earnings are forecast to increase by 25% this year and 15% in 2017.

Institutional ownership of NetEase stock has been on the rise, but shares still trade at a relatively restrained 18 P/E.

NetEase also has $4.4 billion in cash and cash equivalents, which is important in the merger-and-stake-building atmosphere of China’s internet giants.

The stock also pays a useful 1.3% dividend yield. Q2 earnings are likely out the week of August 10.

NTES has been on the rise since late 2012, but it’s been subject to some big volatility, like the correction from $186 to $130 that ran from late December to mid-February.

The stock recently moved to new all-time highs above $190 and should have support at $180. Volatility and earnings due within a month makes going slow a good idea. You can nibble anywhere under $185, with a stop at $170.

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By Mike Cintolo, Editor of Cabot Top Ten Trader

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