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1 Wall Street Pro Warms Up to NetEase Stock

By Rick Munarriz – Nov 28, 2016 at 6:48AM

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One of China's online gaming pioneers receives an opportunistic upgrade from Jefferies analyst Karen Chan this morning.

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Shares of NetEase (NTES 0.24%) may have slipped following a poorly received quarterly report earlier this month, but at least one Wall Street pro sees that weakness as a buying opportunity. Jefferies analyst Karen Chan upgraded NetEase stock to Buy this morning. She feels that NetEase's mobile gaming unit will bounce back this quarter.

Chan feels that this is a good entry point, now that the stock is trading 17% below the all-time high it hit just last month. She's sticking to her $261 price target, an indication that this is a move based more on the opportunity presented by the current valuation than the potential for improving fundamentals. The price goal represents 15% of upside from Friday's close.

She isn't the only one that's taking a shine to NetEase stock following the nearly 10% hit it took on Nov. 10, the day after it posted third-quarter results. Brean Capital's Fawne Jiang jumped in right away, sticking to her earlier Buy rating and bumping her stock's price target from $235 to $310. 

Putting its money where its mouth is

NetEase posted healthy growth in its latest quarter. Revenue soared 38% to $1.381 billion, with growth of at least 23% across each of its three businesses. Earnings grew even faster, climbing 46% to $3.11 per share.  

Analysts were expecting a smaller profit, something that always seems to be the case at NetEase. However, revenue fell short of market expectations for $1.43 billion in revenue. 

NetEase's bottom line is a particularly big deal since the Chinese dot-com pays out 25% of its reported profit to its stakeholders in the form of a dividend. This time around it translates into a $0.78 per share distribution.

NetEase also took advantage of the stock's initial sell-off following the report to announce a new $1 billion share repurchase plan, another way that it's returning money to its investors. NetEase is good for the money. It closed out the third quarter with $4.8 billion in cash and investments. 

NetEase has quietly become one of the most rewarding stocks over the past decade, soaring 1,838% -- a 19-bagger -- since being recommended to Motley Fool Rule Breakers subscribers in late 2004. It got there by consistently surpassing Wall Street's quarterly expectations, so the mixed showing earlier this month won't do. 

The stock is trading at a reasonable 19 times this year's earnings and just 16 times next year's forecast. NetEase is growing a lot faster than those multiples, but there will always be the risk that fickle gamers move on or that the climate for investing in Chinese growth stocks cools. Right now the price seems to offer a good risk/reward proposition, but there's no mistaking that there's a lot of risk and a lot of reward at stake.  

Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends NetEase. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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