Chinese Gaming Stocks Are Cheap

It's hard to bet against NetEase.com (Nasdaq: NTES  ) when it has its game face on.

China's leader in online multiplayer games delivered another blowout quarter last night. Net revenue climbed 32% to $268.2 million, blowing past market expectations for $246.2 million in net revenue. In fact, the $244.1 million that NetEase generated from Web-based gaming revenue -- before we consider its website portal and mobile services -- was nearly enough to cover Wall Street's target.

Earnings grew even faster, soaring 57% to $0.91 a share. Analysts figured that NetEase would come through with a profit of only $0.78 a share. NetEase has now landed well ahead of the pros in four consecutive quarters.

Strength with its proprietary titles and what this past quarter grew into two licensed juggernauts from Activision Blizzard (Nasdaq: ATVI  ) have made NetEase the perfect bellwether for this dynamic niche.

It's not just NetEase that's humbling the prognosticators. All three of the Chinese gaming specialists that have posted their second-quarter results have blown through market estimates.

Copmany

EPS

EPS Est.

NetEase.com $0.91 $0.78
Changyou.com (Nasdaq: CYOU  ) $1.02 $0.93
Giant Interactive (NYSE: GA  ) $0.18 $0.15

 Source: Yahoo! Finance.

Perfect World (Nasdaq: PWRD  ) and Shanda Games (Nasdaq: GAME  ) will report on Monday and Tuesday of next week, respectively.

Target-busting growth apparently hasn't been enough to give these five stocks well-earned market premiums. The five stocks trade between six and 13 times next year's projected profitability.

There will always be the fear that China's restrictive government will shut down this primarily youthful diversion, but that risk appears to be priced into these insanely cheap valuations.

Looking to keep tabs on Chinese video game stocks? Add NetEase or any of its peers to our free My Watchlist feature today!

The Motley Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of NetEase.com and Activision Blizzard and creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin online stocks for a long time. He owns no shares in any of the companies in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 19, 2011, at 12:11 AM, FreeTrade12345 wrote:

    "There will always be the fear that China's restrictive government will shut down this primarily youthful diversion."

    Is this funny? China government gives game companies subsidies every year. If government shuts down game business, where do you want youth to go? What people can do after work?

  • Report this Comment On August 20, 2011, at 1:11 PM, crca99 wrote:

    Thanks for these reports and for providing the sector context. I can't be the only one holding NTES.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1540970, ~/Articles/ArticleHandler.aspx, 9/21/2014 12:29:58 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement