Gaming Isn't Dead in China

If you're looking for the hundreds of thousands of orcs and dwarves that Activision Blizzard (Nasdaq: ATVI  ) appears to be missing, don't bother searching for them in China.

NetEase.com (Nasdaq: NTES  ) came through with better-than-expected quarterly results last night, while also easing doubts about its role in the problematic decline in World of Warcraft players.

Net revenue soared 40% to $307 million in NetEase's third quarter, fueled by a 40% surge in online gaming, a 36% pop in advertising, and even a 50% spike in the seemingly forgotten wireless value-added services. Earnings grew 41% to $129.5 million -- or $0.99 per share -- and that was with a $10.2 million foreign exchange hit.

Analysts didn't have a clue. They were settling for a profit of $0.86 a share on $277.5 million in revenue.

Activision Blizzard investors were jarred last week, learning that the world's largest gaming software company saw its World of Warcraft membership fall from 11.1 million to 10.3 million during the months of July, August, and September. The assumption has been that fickle Asian gamers -- which aren't as lucrative to Activision Blizzard as its higher-paying gamers closer to home -- were to blame for the 800,000 gamer march.

As NetEase is the franchise's licensed distributor throughout China, its shares took a hit last week on the possibility. NetEase isn't dumb enough to call out its partner, but it did single out the game's success in leading NetEase to strong year-over-year top-line growth and a double-digit sequential uptick. In other words, the franchise is still holding up nicely in China.

It's generally been a good quarter for China's online gaming companies. Changyou.com (Nasdaq: CYOU  ) merely met Wall Street's bottom-line expectations, but Giant Interactive (NYSE: GA  ) and now NetEase have landed ahead of the pros.

We'll have the complete picture in a few trading days.

Shanda Games (Nasdaq: GAME  ) reports tomorrow, and Perfect World (Nasdaq: PWRD  ) follows early next week.

China's economy may be slowing, but it's still growing. At the very least, it's not making a dent in this booming, high-margin business. Unjustified fears have pushed NetEase to head-scratching valuations. Despite its consistent market-thumping performances and healthy growth, NetEase is trading for just 11 times forward earnings.

Even if NetEase was caught orc-handed -- which it wasn't -- the stock is too cheap to ignore.

If you want to keep an eye on China's dot-com speedsters, consider adding them to My Watchlist.

The Motley Fool owns shares of Activision Blizzard. The 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 may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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Related Tickers

10/24/2014 3:59 PM
NTES $92.74 Up +0.64 +0.69%
NetEase.com CAPS Rating: ****
ATVI $19.17 Up +0.11 +0.58%
Activision Blizzar… CAPS Rating: *****
CYOU $18.16 Up +0.32 +1.79%
Changyou.com CAPS Rating: **
GA.DL $0.00 Down +0.00 +0.00%
Giant Interactive… CAPS Rating: ***
GAME $6.51 Up +0.01 +0.15%
Shanda Games Limit… CAPS Rating: ***
PWRD $21.43 Up +0.22 +1.04%
Perfect World CAPS Rating: ***

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