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Lukewarm Analysts Can't Sink NetEase Stock

By Rick Munarriz - Oct 10, 2017 at 10:09AM

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The Chinese online gaming pioneer moves 4.9% higher last week despite three cautious analyst notes.

Even ho-hum analysts aren't stopping investors from bidding up NetEase (NTES -0.02%). Shares of the Chinese online gaming speedster moved higher in four of the five trading days last week, despite receiving uninspiring analyst notes in three of those days. 

Karen Chan at Jefferies kicked things off on Tuesday of last week, downgrading the stock from buy to hold and lowering her price target from $330 to $290. Gregory Zhao at Barclays followed a day later, initiating coverage with a neutral equal weight rating. Han Joon Kim at Deutsche Bank finished things off on Friday, sticking to his bullish call but slashing his price target from $348 to $325. Shares of NetEase bucked the emergence of lukewarm Wall Street pros, rising nearly 5% last week. 

Screen shot of a NetEase multi-player online game.

Image source: NetEase.   

Game on in China

The timing of the skittish analyst notes is not a coincidence. Deutsche Bank's Kim lowered his price target on fears that softness in mobile gaming could result in a miss when NetEase reports its third-quarter results in a few weeks. He's optimistic that NetEase's pipeline of new releases will fare well, and that's why he's sticking to his bullish call. However, he feels that there may be a shake out with expectations reset after a possible miss in early November. 

Barclays' Zhao isn't as upbeat, hence his $260 price goal that is below where the stock is presently perched. He doesn't see the the same vibrant pipeline as Kim, and he sees this as a downside risk to next year's estimates. Jefferies' Chan also sees near-term risks to earnings as the market waits out the next hit out of NetEase's hit factory. 

NetEase doesn't stand still. It put out more than 40 mobile games last year alone. The stock has been a consistent winner, and 2017 remains on track to be its fifth straight year of double-digit percentage gains. Analysts already see earnings taking a step back during the latter half of this year, but NetEase is still posting double-digit revenue growth -- this will be its tenth consecutive year for that -- and it's trading at less than 17 times next year's profit target.   

With revenue growing a lot faster than its earnings multiple and a growing dividend -- NetEase shells out 25% of its earnings in the form of quarterly payouts -- it's tempting to ignore last week's uninspiring analyst notes. Investors shouldn't do that, as three analysts growing cautious just days apart for a quarter that just ended shouldn't be ignored. NetEase will have a lot to prove next month, but thankfully for those long the stock, it has been more than up to the task before. 

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NetEase. The Motley Fool has a disclosure policy.

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