One of last week's biggest winners was NetEase (NASDAQ:NTES), moving 21.3% higher after posting its third-quarter results on Thursday afternoon. Analysts issued largely positive updates on the Chinese online gaming and portal darling following the fresh financials, though CLSA did buck the trend by downgrading the shares.
It was a strong quarter for NetEase. Revenue rose 36% to $1.88 billion. A 24% increase in its online gaming revenue -- the key driver at 65% of NetEase's total top-line results -- got a lift from headier growth from the rest of its advertising, email, e-commerce, and other online businesses. Revenue was roughly in line with the $1.89 billion that analysts were targeting. Adjusted earnings growth was flat, as a spike in its e-commerce initiatives also generated a surge in related operating expenses. However, that profit also met Wall Street expectations.
More than just playing games
A few Wall Street pros jacked up their price targets late last week. Han Joon Kim at Deutsche Bank is giving his price goal a modest lift from $325 to $334, eyeing a gradual recovery through next year. Alicia Yap at Citi is slightly more encouraged, raising her price target from $320 to $351. She's upbeat on NetEase's efforts to broaden its game offerings. She sees monetization for Minecraft -- which NetEase introduced as a licensed partner during the quarter and quickly ramped up to 30 million registrations -- and other new releases picking up next year.
The biggest bullish move came from Jialong Shi at Nomura Instinet. He upgraded the stock to buy from neutral, upping his price target on the stock from $297 to $428. He sees earnings climbing 25% next year, fueled by a recovery in mobile gaming revenue as a result of a strong pipeline of 2018 releases.
The lone worrywart last week was Man Ho Lam at CLSA, who downgraded the stock from underperform to sell. He's concerned that unfavorable revenue and earnings momentum will continue into the first half of next year. He has his concerns on some gaming titles, and his $283 price goal represents 23% of downside off last week's record close.
Ultimately, the well-received report was a welcome recovery from its disappointing second-quarter results that sent the shares 10% lower the next day. There is uncertainty in the stock even after last week's bullish market reaction. There's a lot riding on recently introduced licensed games and the promising pipeline of 2018 releases. We'll also have to see if NetEase can keep costs in check as it throws more weight on near-term profit-slurping e-commerce initiatives including Kaola.com and Yanxuan. There will be some near-term cloudiness in assessing NetEase's near-term prospects, but as it wraps up its fifth straight year of double-digit percentage gains, it's hard to bet against the market darling.