Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



NetEase, Perfect World, and Giant Are Cheap Gamers

China's online gaming companies continue to toil in undervalued obscurity. NetEase (NASDAQ: NTES  ) posted mixed financial results last night. Net revenue climbed 10% to $380.5 million. There was improvement in all three business categories, including online gaming, which accounted for a little more than 85% of total revenue.

Gross profit margins improved, but a spike in sales taxes combined with operating expenses' outpacing of top-line growth led to a more modest 6% increase in earnings. Profitability clocked in at $1.38 a share. The company missed on both ends of the income statement: analysts were holding out for $1.40 a share in net income and $390.9 million in net revenue.

Nobody appreciates a miss, but NetEase is too cheap at this point to punish it too hard for something that was largely out of its control. Activision Blizzard's (NASDAQ: ATVI  ) World of Warcraft -- which NetEase publishes in China -- has been shedding players worldwide over the past couple of years. NetEase's in-house games, mobile initiatives, and other online properties are growing just fine. 

How cheap is NetEase? It's a bargain at just 12 times this year's earnings and 11 times next year's profit forecast. It's even cheaper when you consider that NetEase has $3.1 billion -- or a little more than $23.70 a share -- in cash and long-term investments. Back that out and NetEase's enterprise value multiple drops into the single digits, even based on trailing earnings. 

Risk averse investors may be fine paying earnings multiples in the mid-teens for the slower growing Activision Blizzard, and there's nothing wrong with that. It's a reasonable value, and Activision Blizzard has a rich portfolio and pipeline to offset World of Warcraft's struggles. However, diehard gamers may like the valuations that they see when eyeing China's remaining publicly traded online gaming companies.

They'll some more snapshots when two of NetEase's peers report next week. 

Giant Interactive (UNKNOWN: GA.DL  ) reports quarterly results on Wednesday. It's trailing earnings multiple of 12 is reasonable. It's not expected to grow as fast as NetEase, but it has beaten Wall Street's profit targets in its past three outings. That contrasts with NetEase, which has now come up short on the bottom line twice over the past three reports. 

Perfect World (NASDAQ: PWRD  ) reports on Monday afternoon. Like NetEase, it too has missed analyst profit forecasts twice over the past three quarters. However, it's trading at a ridiculous seven times next year's estimated earnings. 

China's online gaming stocks are cheap for a reason. It's China, and regulators have been cautious about the addictive nature of video games when it comes to the country's youth. Then again, gaming is all about taking chances. NetEase, Perfect World, and Giant Interactive are too cheap to ignore.

Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

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: 2959215, ~/Articles/ArticleHandler.aspx, 8/27/2015 3:42:27 PM

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...

Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

Today's Market

updated Moments ago Sponsored by:
DOW 16,413.51 128.00 0.79%
S&P 500 1,967.37 26.86 1.38%
NASD 4,746.62 49.08 1.04%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
GA.DL $0.00 Down +0.00 +0.00%
Giant Interactive… CAPS Rating: ***
NTES $120.20 Up +8.77 +7.87% CAPS Rating: ****
PWRD $0.00 Down +0.00 +0.00%
Perfect World CAPS Rating: ***
ATVI $27.50 Up +0.21 +0.77%
Activision Blizzar… CAPS Rating: *****