Many Chinese growth stocks have started bouncing back, but the same can't be said about NetEase (NTES 1.61%). The Chinese online gaming pioneer hit another 52-week low earlier this month, and it's trading nearly 30% below the all-time highs it hit late last year.
The good news is that NetEase offers up its latest financial results after Wednesday's market close, and a strong report can catapult the shares back into favor. The bad news is that investors hoping for the same thing last time out got burned. NetEase stock took a big hit after posting disappointing quarterly results in early February.
What investors expect
Analysts aren't holding out for much. They see revenue climbing a mere 1.5% to $2.18 billion, NetEase's weakest top-line growth since 2009. This will also likely put an end to a 15-quarter streak of at least double-digit revenue growth.
The news gets even hairier on the bottom line. Wall Street pros see NetEase checking in with a profit of $1.97 a share, less than half of the $4.66 a share that it posted a year earlier. This will be the third quarter in a row with NetEase posting a decline in profitability. Investors were cool with the step back the first time. The stock actually moved sharply higher after last year's third-quarter results, hitting those new all-time highs a few weeks later. Things are different these days.
NetEase's margins are getting squeezed as its revenue mix shifts away from the high-margin online gaming business that made it a market darling through most of the past decade. NetEase stunned investors in February when its online game services division reported an 11% drop in revenue. The decline was more than offset by a 175% surge in its newer e-commerce initiatives and a 55% pop in its older ad-supported email platform, but those offerings can't match the profitability that NetEase has enjoyed on the gaming front.
Analysts have approached the stock's retreat with mixed reactions. Some firms including CLSA and Macquarie argue that the valuations are compelling after the sell-off in recent months. Other Wall Street pros aren't as easily convinced that the nearly 30% slide off of late December's highs isn't warranted. Alex Yao at JPMorgan resumed coverage of the stock with an underweight rating. He sees this as a transition year as it enters a less profitable stage of its cycle given diminishing gamer monetization trends.
Absent new online gaming hits and the profit-slurping nature of its Kaola.com and Yanxuan e-commerce platforms, it will be hard for NetEase to bounce back. NetEase has a lot to prove on this week, and the stock will be likely be a big mover on Thursday following Wednesday afternoon's report.