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Can NetEase Stock Bounce Back After Last Week's 10% Drop?

By Rick Munarriz - Jul 3, 2017 at 9:08AM

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The Chinese online gaming pioneer slips after announcing a new CFO, but the stock is still working on its fifth straight year of double-digit gains.

One of last week's biggest losers was NetEase (NTES 0.65%), moving 9.9% lower. There was no company-specific news outside of an announcement that it had settled on its next CFO. NetEase revealed early in the trading week that Zhaoxuan Yang would step up as its next CFO, replacing Onward Choi by the end of the week.

Wall Street doesn't tend to look kindly when financial executives move on at major companies, but Choi's departure was old news. He tendered his resignation nearly two months ago for personal reasons, and he also will stay on as a consultant though the coming year to make sure there's a smooth handoff with Yang. 

Screenshot of Fantasy Westward Journey, a NetEase online game.

Image source: NetEase.   

Game on 

NetEase stock retreated over the past week, but longs can't complain. Shares of the online gaming pioneer are still trading 35.4% higher year to date. This is shaping up to be the fifth consecutive year of double-digit percentage gains at NetEase, with the stock becoming nearly an eight-bagger in that time. 

Blazing growth has been at the heart of NetEase's success. Net revenue soared 72% in its latest quarter, with double-digit growth across its online gaming, internet portal, and online advertising segments. Gross and net margins contracted, but adjusted earnings still rose at a better-than-expected 63% clip.

NetEase's stock has been a big winner in recent years, but it's largely keeping up with its heady growth. The stock is trading at 19 times this year's projected profit, higher than its historical average but more than warranted for a company growing a lot faster than that rate.

Wall Street has been cooling off on the stock these days. Analysts at CLSA, Standpoint Research, and Nomura Instinet have downgraded NetEase stock over the past two months. Fears of tightening margin and the stock's valuation are weighing on the minds of Wall Street pros. 

It's still hard to bet against NetEase given the years of bullish momentum. It's also hard to mark the stock down on valuation when it's coming off a quarter in which its adjusted earnings rose three at a rate that's three times its forward earnings multiple. 

Investors are being paid to be patient. NetEase pays roughly a quarter of its earnings as quarterly distributions, a sum that amounts to a current yield of 1.4% but growing with every passing financial report. NetEase isn't the bargain it was a few years ago, but it continues to be one of China's steadiest growth stocks. 

Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends NetEase. The Motley Fool has a disclosure policy.

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