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NetEase Is a Party Pooper

Investors in Chinese gaming stocks have seen some pretty impressive earnings reports lately. Giant Interactive (NYSE: GA  ) topped expectations last week. The9 (Nasdaq: NCTY  ) and Perfect World (Nasdaq: PWRD  ) followed suit on Monday. This came on the heels of Sohu.com's (Nasdaq: SOHU  ) showing of robust growth in its fledgling online gaming in April. Last night was NetEase.com's (Nasdaq: NTES  ) turn to keep the party going.

It dropped the punch bowl.

The company behind China's popular Fantasy Westward Journey earned $0.30 per American depositary share during the first quarter, just below the $0.32 a share it earned a year ago and the $0.31  that analysts were expecting.

That's close, but we're not playing horseshoes here. NetEase still missed, and the miss underscores an otherwise solid report.

Revenue climbed 18% to $93.0 million, on the strength of a 15% boost in its online gaming business (now 85% of the revenue mix), a strong 38% surge in online advertising, and a 13% uptick in its previously moribund wireless value-added services arm. Wall Street was looking for only $82.3 million the top line.

Investors shouldn't read too much into the bottom-line miss, because like most companies, NetEase is paying a higher tax rate in China this year. NetEase's pretax profits actually improved by 15%, in line with its revenue gain.

If there is any consolation for NetEase, it's that it fared better than CDC (Nasdaq: CHINA  ) .

The software maker, which also posted quarterly results last night, reported a small loss despite a 12% increase in revenue from continuing operations. CDC runs the China.com portal and is making a stab at the seemingly crowded online-gaming niche in China, but its bread-and-butter business remains selling corporate software solutions outside China, the country.

As for the state of online gaming, we have one more bellwether to go. Shanda Interactive (Nasdaq: SNDA  ) can get the party started again with next week's report. In the meantime, Chinese gaming companies are in a literal lull. China's Internet cafes reopened this morning, after three days of mourning for the victims of last week's catastrophic earthquakes.

NetEase came up short, but with nearly $5 a share in cash and growing again in a high-margin niche, it can't keep this party quiet for too much longer.

NetEase and Shanda were recommended to Motley Fool Rule Breakers premium research newsletter subscribers a couple of years ago. Find out how to play the growth-stock game with a free 30-day trial subscription offer today.

Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin gaming stocks for a long time. He is part of the Rule Breakers research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. The Fool has a disclosure policy.


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Rick Munarriz
TMFBreakerRick

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.

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