The video game publisher's share price rebounded from sell-offs in May and gained ground on news that the company had signed a deal with a new development partner. Its stock also appears to have benefited from an expansion of the company's buyback program.
NetEase announced on June 1 that it had signed a development deal with Bungie, the studio responsible for Activision Blizzard's Destiny series and the early games in Microsoft's Halo franchise. The company also said on June 11 that it expanded its stock repurchasing program, with authorization to increase its buyback initiative from $1 billion to $2 billion.
NetEase stock reached a lifetime high at the end of 2017 but has sold off this year on signs that some of its key legacy titles are losing steam and because of increased competition from companies like Tencent Holdings. Shares lost roughly 11% in May, primarily due to first-quarter earnings results that included a 19% year-over-year sales decline. It's possible that the market came to view the game publisher's stock as oversold following a series of monthly declines in 2018 and bid the stock back up following some encouraging news in June.
China is already the world's biggest market for video games, and it looks like the industry is still poised for rapid growth in the country. That should give NetEase a favorable backdrop to work against.
In addition to publishing its own games and those of its local partners, NetEase also benefits from being one of the leading partners for Western publishers. Due to regulations in China, foreign companies typically need to publish their titles through a local partner if they want to tap into the country's high-growth games market. So, the Chinese publisher has some significant strengths and tailwinds at its back, but investors should still pay attention to its development pipeline in order to assess whether the company is making progress on delivering new hit franchises.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Keith Noonan owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard, NetEase, and Tencent Holdings. The Motley Fool has a disclosure policy.