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3 Reasons NetEase Is Hitting New Highs Ahead of Quarterly Results

By Rick Munarriz - Feb 16, 2020 at 3:00PM

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The Chinese gaming and online services giant is trading at its highest level in more than two years, and that's with a big earnings report on the way.

China may not seem like a hotbed for growth, with the economy slowing in the world's most populous nation, but NetEase (NTES -0.02%) still found a way to notch another 52-week high on Friday. The provider of online services and casual games doesn't report financial results until later this month, but obviously investors think it will do just fine, going by its buoyant stock.

This isn't an all-time high for NetEase. The stock was trading nearly 7% higher when it peaked in late 2017. However, for the stock to push to its highest level in more than two years is notable in itself, making it one of the few Chinese stocks scoring fresh recent highs last week. So let's review three reasons the market is warming up to NetEase again.

A screen from one of NetEase's more iconic game releases.

Image source: NetEase.

1. A blowout is a blowout

It's been nearly two months since NetEase last announced financial results, but when it did, it hit the ball out of the park. NetEase posted an 11% increase in revenue in the third quarter, with an even meatier 74% surge in adjusted earnings from continuing operations. 

The climate isn't kind in China when it comes to online advertising, and regulators have been known to put the clamps on the mobile and PC gaming industries form time to time. But NetEase has managed to persevere through the highs and lows. By the time 2019 is in the books, it will be 12 consecutive years of double-digit revenue growth for NetEase, and that's the kind of winning streak that commands the market's respect. 

2. A resurgent IPO matters

One of last year's forgotten Chinese IPOs -- Youdao (DAO 0.92%) -- is showing signs of life in 2020. The Chinese intelligent-learning company has soared 64% so far this year, and it's now well above its original $17 offering price after spending most of 2019 as a broken IPO. 

Youdao has been one of the few market winners in the wake of the coronavirus outbreak, as the operator of e-learning solutions is seen as a beneficiary if the virus continues to intensify and physical schools temporarily close down. On top of that, Youdao was already on a roll, with gross billings for its online courses more than doubling over the past year. Its K-12 student base has nearly tripled. 

NetEase has skin in this game, having spun Youdao off last year and commanding a 67.6% stake at the time of the IPO. But even so, Youdao may not move the needle much for NetEase. This is a $2.6 billion company, so NetEase's position is worth roughly $1.8 billion, while NetEase commands an enterprise value just shy of $40 billion. However, some investors who want in on Youdao could choose to buy the less risky NetEase instead. 

3. Analysts keep falling behind

Seeing a company routinely smoke Wall Street profit targets is great, but the only thing better than that is when the percentage of the beat is widening. If the positive surprises keep getting larger, it's a good sign that Wall Street's growing more out of touch with a business through every passing quarter.

Quarter EPS EPS Estimate Surprise
Q4 2018 $1.96 $1.52 29%
Q1 2019 $3.39 $2.28 49%
Q2 2019 $3.96 $2.62 51%
Q3 2019 $5.12 $3.12 64%

Data source: Yahoo! Finance.

If investing in China stocks is an idea you find stressful, there's no list that will change your mind. However, NetEase is scoring two-year highs because investors believe in momentum. There's a lot to like in NetEase as an investment right now.

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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Stocks Mentioned

NetEase, Inc. Stock Quote
NetEase, Inc.
NTES
$88.98 (-0.02%) $0.02
Youdao, Inc. Stock Quote
Youdao, Inc.
DAO
$4.40 (0.92%) $0.04

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