In the spirit of the Winter Olympics, The Motley Fool is pitting companies against one another. The writers will outline why their company is the best, and our very own panel of judges will decide the winner after a period of deliberation. Stay tuned for more!
China may have won just one gold medal in the Winter Olympics so far, but there is no denying the significance of owning a stake in the world's most populous region. With 1.3 billion residents, the country's economy has been booming over the past few years.
Want proof? Look no further than NetEase (Nasdaq: NTES ) . The company started out a few years ago alongside SINA (Nasdaq: SINA ) and Sohu.com (Nasdaq: SOHU ) as providers of wireless text messaging entertainment. It was a huge business, until the government got critical of some of the content that was being sold and moved quickly to regulate the industry.
The major players scattered in different directions. NetEase made the more prolific choice of going into online gaming, a decision that has definitely paid off. The company won't report on its fourth-quarter results until next week, but we can certainly key off the company's inspiring third quarter production.
Earnings more than doubled to $0.89 a share for the September quarter, with revenues soaring 83% higher. Given the gaming sector's high margins and China's liberal tax code, NetEase's net margins clocked in at an amazing 55.9%. Yes, that's not a misprint. About $0.56 off every buck the company generates in sales trickles down to the bottom line.
Naturally NetEase isn't alone. Shanda Interactive (Nasdaq: SNDA ) was the top dog when NetEase stormed onto the scene, and The9 (Nasdaq: NCTY ) has been a force since rolling out its licensed version of World of Warcraft last year. This doesn't mean that there has to be just one winner. There have been as many as 827,000 people playing NetEase's Fantasy Westward Journey at the same time. It sounds like a lot, but we're also talking about a nation of 1.3 billion -- yes, billion -- residents.
The fact that NetEase is doing so well -- while most of these players are paying pennies an hour in stuffy Internet cafes -- is encouraging. As the economy in the region continues its torrid growth, it won't be long before NetEase is able to charge more for its games and more Chinese citizens can afford to play at the cafes, as well as buying computers for the home.
The potential is substantial and we're just getting started. NetEase shares have risen 38% higher since being recommended to Motley Fool Rule Breakers newsletter service subscribers -- but the games have only just begun. A country with 1.3 billion individuals has to be good for more than one gold medal -- and more than one dynamic growth stock.
Check in with the other competitors:
- Best International Stock: Mittal
- Best International Stock: Lloyds TSB
- Best International Stock: Embraer
- Best International Stock: Diageo
SINA is aMotley Fool Stock Advisorpick.
Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin gaming stocks for a long time. He recommended NetEase.com 14 months ago to subscribers of the Rule Breakers newsletter, where he's seeking out tomorrow's ultimate growth stocks a day early. The Fool has adisclosure policy.