Investing overseas is risky, especially in a red-hot Chinese stock market padded with geopolitical challenges. Still, I tend to rest easy whenever online gaming giant NetEase (Nasdaq: NTES) reports its quarterly results.
The company's now beaten analyst estimates in all but one of the last 11 straight quarters. It's also not as pricey as many of China's other growth stocks, trading for less than 16 times trailing earnings despite its continued gains.
Last night's report? Smooth as usual. Revenues inched 9% higher, to the equivalent of $71.8 million. Earnings per ADS rose to $0.29, after a $0.26 showing a year ago. Analysts were outsmarted again, having expected a profit of $0.27 per share on $67.8 million in revenue.
It wasn't a perfect quarter. The company's open beta of Tianxia II back in March went poorly, prompting the company to delay its commercial launch to update the game's design. This would be a problem if the company's flagship Fantasy Westward Journey online game had peaked, but that doesn't appear to be the case. The multiplayer role-playing game had more than 1.5 million simultaneous players at one point, a new peak concurrent usage record for NetEase.
Westward Journey III went into closed beta over the weekend, but there isn't a lot riding on it, even with Tianxia's disappointment. The second installment in the Westward Journey series didn't cannibalize the popular original, and the upgrade is geared more toward users of the second game than those currently engrossed in Fantasy Westward Journey.
Online gaming is NetEase's most important business segment. A few years ago, this company specialized in wireless leisure services and running a popular Internet portal, but these days, online gaming accounts for 87% of its revenue mix. While it's nice to hear the company announce initiatives to beef up its portal and market its proprietary search engine, these things probably won't make China's paid search leaders Baidu.com (Nasdaq: BIDU) and Google (Nasdaq: GOOG) nervous.
Am I concerned that the CFO is resigning this summer for "personal reasons," and that a board member also announced his retirement? Until NetEase's numbers give me cause to worry, these developments don't really unsettle me.
NetEase won't be the next Enron, and it shouldn't aspire to be the next Baidu. It's too busy being the first NetEase. Judging by my calm demeanor before last night's report, that's a good place for NetEase to be.
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Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin gaming stocks for a long time. He is also part of the
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newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. The Fool has a disclosure policy.
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