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Why NetEase Stock Is Rising This Week

By Eric Volkman – Oct 8, 2021 at 9:24AM

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An important strategy shift from a subsidiary is pleasing analysts and bringing back bullish investors.

What happened

The stock of veteran Chinese tech company NetEase (NTES 3.88%) has been coasting over the past few days. As of market close on Thursday it was up nearly 15% from the end of last week on the back of news from a subsidiary and subsequent positive coverage from a pair of analysts following the stock.

So what

The subsidiary in question is education services provider Youdao, which announced late last week that it will no longer offer after-school tutoring services for subjects in the national curriculum. It's making this change, in its words, "as part of its efforts to fully comply with applicable [Chinese] regulatory requirements."

A child amused by something on a laptop.

Image source: Getty Images.

Recently the government launched a crackdown on the for-profit education sector in the country. It's concerned that these occasionally pricey services could dissuade people from having more than one child to help support the nation's population-boosting ambitions.

So Youdao/NetEase is playing ball with the government, and investors seem to be breathing a sigh of relief.

Youdao is an important subsidiary for NetEase, but the parent company has numerous other irons in the fire. The company's considerable presence in the gaming segment is a key reason why CMB International Securities prognosticator Sophie Huang initiated coverage on the company with a buy recommendation. Her $123-per-share price target implies nearly 30% growth from current levels.

"NetEase is well-positioned to capture game premiumization trend with strong 2021-2022 pipeline and overseas expansion. Backed by its outstanding R&D and operation capabilities, we believe NetEase can keep solid growth (game +11% YoY in [full-year 2021]) and strengthen its leadership," Huang wrote in a research note made public on Tuesday.

That same day, China Renaissance, in the person of analyst Yiwen Zhang, lifted its price target on the stock to $134 per share from the previous $123.

Now what

Youdao's strategic retreat in after-school tutoring is shining a brighter light on NetEase's gaming operations, which are substantial. If the tech company can hit Huang's double-digit growth estimates, it should be able to attract even more investors back into its stock.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends NetEase. The Motley Fool has a disclosure policy.

Stocks Mentioned

NetEase Stock Quote
$70.90 (3.88%) $2.65
Youdao, Inc. Stock Quote
Youdao, Inc.
$4.93 (5.12%) $0.24

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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