NetEase: A Chinese All-Star

02/28/2017 7:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

With 19 previous appearances in our newsletter, NetEase (NTES) is kind of a Top Ten All-Star. the company is a giant in the Chinese online gaming industry, which is one of the largest in the world, asserts Mike Cintolo, editor of Cabot Top Ten Trader.

Starting back in 2009, when the company won the Chinese franchise for World of Warcraft, NetEase has forged ahead, building its in-house game creation staff.

The company has been turning out massively multiplayer online role-playing games (MMORPGs) based on Chinese themes and traditions. Players pay for game time and for in-game purchases of items that enhance game play.

NetEase enjoyed 58% revenue growth in 2016 and earnings soared from $8.86 per share in 2015 to $14.51 in 2016.

Three quarters of revenue comes from game services, but the company also operates one of the biggest Chinese web portals, which brings in the remainder in advertising and other sources.

NetEase appears to have mastered the process of producing fresh, compelling game content, and its revenue growth keeps investors interested.

The company’s Q4 earnings results on February 15 blew away analysts’ estimates, with earnings coming in at $4.30 per share where $3.44 was expected.

Revenue was similarly ahead, with $1.74 billion versus the expected $1.58 billion. The future looks bright and the 1.3% dividend, while not compelling, doesn’t hurt either.

Technically, NTES has been in a long-term uptrend since early 2013, and the rate of advance has steepened in recent years. The stock soared from a correction low of $129 in April 2016 to $271 last October.

A seven-week correction to 211 in December set the stage for the latest rally, which booted the stock to $262 before the post-earnings rally that exploded NTES to $299.

A little patience should present an opportunity for a buy below $295. A loose stop at $265 (near the bottom of its earnings gap) makes sense as volatility may be high.

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