Chinese Gaming Stocks Are Cheap

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It's hard to bet against (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.



EPS Est. $0.91 $0.78 (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 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.

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  • 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.

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