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Nothing Comes Easy for NetEase

Not every online gaming company is created equal. Just two days after Perfect World (Nasdaq: PWRD  ) posted breathtaking third-quarter results -- showing off a 55% top-line spurt and a 45% earnings surge -- (Nasdaq: NTES  ) reported earnings in slow motion.

The Chinese company's revenue climbed just 9% to $128.8 million during the same three months. Earnings held up better, increasing 26% to $0.44 a share. Perfect World was a tough act to follow, but NetEase didn't even live up to Mr. Market's expectations. Analysts were targeting a profit of $0.49 a share on $138.7 million in revenue (which would have called for revenue to grow twice as quickly as it ultimately did).

NetEase has a scapegoat, but it's on a short leash. Regulators kept NetEase from launching its licensed version of Activision Blizzard's (Nasdaq: ATVI  ) World of Warcraft in China until Sept. 19, less than two weeks before the quarter came to a close. There is still some uncertainty as regulators fight among themselves over the game's status, but at least the game's already been up and running in China a lot longer during the current quarter than it was during the previous one.

Even without WoW, however, NetEase still should have been able to deliver better growth organically. All of the company's growth came from its online gaming business, which now accounts for a meaty 88% of revenue. Online advertising through its portal, and its content services for mobile phones, just aren't moving the needle anymore.

Beyond World of Warcraft, NetEase has a rich pipeline of new games and expansion packs for existing franchises on the way. Slow growth is still better than no growth, and at the service's peak usage for the quarter, on Aug. 2, as many as 2.5 million Chinese gamers were playing NetEase titles simultaneously.

The company still has plenty to prove. After blowing analysts away in each of its three previous quarters, last night's miss is problematic. Perfect World and (Nasdaq: CYOU  ) had no problem beating Wall Street guesstimates during the same period. Rivals Giant Interactive (NYSE: GA  ) and Shanda (Nasdaq: SNDA  ) report over the next two weeks.

It's time to get back in the game, NetEase. You may have fewer investors than you do paying gamers, but the former are far hungrier for a win next time around., Perfect World, and Shanda Interactive are Motley Fool Rule Breakers recommendations. Activision Blizzard is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin gaming stocks for a long time. He is also part of the Rule Breakers newsletter 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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10/28/2016 4:00 PM
NTES $264.97 Down -2.08 -0.78%
NetEase CAPS Rating: ****
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GA.DL $0.00 Down +0.00 +0.00%
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PWRD.DL $0.00 Down +0.00 +0.00%
Perfect World CAPS Rating: ***
SNDA.DL $0.00 Down +0.00 +0.00%
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