NetEase, Inc. (NTES) provides online services focusing on international gaming, communication, and commerce. The stock has lost 20.1% over the past year to close yesterday’s trading session at $139.83. In addition, it is currently trading 24.5% below its 52-week high of $120.84, which it hit on May 21, 2021, due to the Chinese government’s crackdown on technology companies.

China’s signal to pause the crackdown on the nation’s technology sector might benefit NTES and other Chinese stocks, such as Alibaba Group Holding Limited (BABA). However, analysts slashed the earnings estimates for the Chinese technology giants like BABA for a second straight month amid the nation’s persistent goal of its Covid-Zero strategy. Overall, NTES is fundamentally better positioned compared to BABA.

Here’s what I think could influence NTES’ performance in the upcoming months:

Robust Financials

NTES’ net revenues increased 23.3% year-over-year to $3.80 billion in the fourth quarter, which ended December 31, 2021. The company’s operating profit grew 53% year-over-year to $723.12 million, while its non-GAAP net income came in at $1.03 billion, representing a 312.8% year-over-year increase. Also, its non-GAAP EPS came in at $0.31, up 321.3% year-over-year.

Favorable Analyst Estimates

For the quarter ending June 30, 2022, analysts expect NTES’ EPS and revenue to grow 11.4% and 15.1% year-over-year to $1.08 and $3.66 billion, respectively. In addition, its EPS is expected to grow at 20.6% per annum over the next five years. Moreover, Wall Street analysts expect the stock to hit $128.33 in the near term, indicating a potential upside of 32.5%.

High Profitability

In terms of trailing-12-month ROTA, NTES’ 10.97% is 265.4% higher than the industry average of 3%. Likewise, its trailing-12-month net income margin of 19.24% is 240.3% higher than the industry average of 5.65%. Moreover, the stock’s trailing-12-month ROCE and ROTC of 19% and 8.72% are higher than the industry averages of 7.36% and 3.92%, respectively.

POWR Ratings Show Promise

NTES has an overall rating of B, which equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. Out of these categories, NTES has a B grade for Value, in sync with its forward non-GAAP PEG of 0.95x, 31.2% lower than the industry average of 1.38x.

The stock has an A grade for Sentiment, consistent with its revenue and earnings growth estimates.

Beyond what I have stated above, we have also given NTES grades for Growth, Stability, Momentum, and Quality. Get all the NTES ratings here.

NTES is ranked #2 out of 46 stocks in the China industry.

Bottom Line

NTES reported impressive fiscal fourth-quarter results despite rising COVID-19 cases and labor and supply shortages. It is well-positioned to benefit from the strong gaming demand. So, it could be wise to buy the dip in the stock.

How Does NetEase (NTES) Stack Up Against its Peers?

NTES has an overall POWR Rating of B. You could also check out these other stocks within the China industry with an A (Strong Buy) or B (Buy) rating: Fuwei Films Co. Ltd. (FFHL), FinVolution Group (FINV), and China Automotive Systems, Inc. (CAAS).

NTES shares were trading at $96.19 per share on Friday afternoon, up $4.90 (+5.37%). Year-to-date, NTES has declined -5.06%, versus a -12.46% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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