NetEase Scores in the Fourth Quarter

Three months later, NetEase.com (Nasdaq: NTES  ) is cleaning up nicely.

The Chinese online-gaming giant posted better-than-expected fourth-quarter results last night, overcoming its weak third-quarter showing.

Revenue soared by 62% to $189 million. NetEase put out several games toward the end of last year, including the ninth expansion pack for its flagship Fantasy Westward Journey franchise.

This was also the first complete quarter of World of Warcraft in the company's books. NetEase was finally able to relaunch its licensed version of Activision Blizzard's (Nasdaq: ATVI  ) global juggernaut in mid-September.

The only downside to the popular franchise is that it doesn't pack the same kind of lofty profit margins that NetEase typically scores with its homegrown games. Forking over meaty royalties to Activision Blizzard caused gross margin to slip from 88% a year ago to a still-respectable 71% this time around.

Releasing a flurry of new games also entails heavy initial marketing outlays, so chunky operating expenses weighed down the already suppressed gross margins. In the end, NetEase earned $0.64 a share, essentially flat with last year's $0.65 a share showing.

Investors typically run for the hills when they see flat earnings on top-line spikes, but the margin contraction isn't problematic under these unique circumstances. Analysts were expecting a profit of only $0.59 a share on $179 million in revenue.

Online gaming makes up 84% of NetEase's revenue, but we should also cover the company's healthy gains in online advertising. Rival portal operators Sohu.com (Nasdaq: SOHU  ) and SINA (Nasdaq: SINA  ) have been sluggish in recent quarters, but NetEase's ad revenue shot up by 64%.

This is certainly impressive, but online gaming will remain the key driver here as NetEase's fate aligns closer to Chinese multiplayer mavens Shanda Games (Nasdaq: GAME  ) , Perfect World (Nasdaq: PWRD  ) , and Giant Interactive (NYSE: GA  ) .

Judging by last night's results, apparently that's not a bad place to be.

Are you comfortable investing in Chinese stocks these days? Share your thoughts in the comments box below.

NetEase.com, Perfect World, and Sohu.com are Motley Fool Rule Breakers picks. Activision Blizzard and Sina are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a synthetic long position on Activision Blizzard and a write puts position on Perfect World. The Fool owns shares of Activision Blizzard. 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 owns no shares in any of the companies in this story. The Fool has a disclosure policy.


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