Here's What Investors Need to Know About NetEase Inc.'s Third-Quarter Earnings

If you're interested in investing in Chinese stocks or are already invested in this space, you're likely familiar with the tech giant NetEase (NTES -1.91%). While regulatory concerns have dragged shares down in recent months, the company reported a robust third quarter. In this segment of Backstage Pass, recorded on Nov. 17, Motley Fool contributors Brian Withers and Jeremy Bowman discuss the noteworthy success of this global Chinese company. 

Brian Withers: NetEase, a Chinese conglomerate that does a little bit of just about everything right?

Jeremy Bowman: Yeah, I think they are like a lot of these Chinese tech companies and they've got their hands in a few different markets. They're primarily a gaming company. They do PC and mobile games. Let me do my screen share here and pop up my slide. They're, about 70% of revenue comes from games, and then they're involved in other businesses like music streaming.

They also are the majority owner of Youdao, which if anybody out there follows the Chinese education sector which has gotten annihilated here [laughs] they're majority owner there, but they've actually fared pretty well. You can see by the chart here, I think that's pretty solid performance for a Chinese stock this year. Let's talk about the quarter. Third-quarter revenue was up 18.9% to $3.44 billion.

That edged out estimates at $3.336 billion. Revenue was up 15 percent in online games to $2.5 billion, that's the majority of their business there. Youdao was up 55% to $250 million, that's a small part of the business, but fast-growing. The category they call innovative businesses, which is mostly their music streaming, was up 26% to $761.1 million. Earnings-per-share ticked up 7%, awesome margins there, but missed estimates at 94 cents. The company didn't give a guidance which a lot of Chinese companies don't do.

The stock was unchanged on the report and seem like the market barely noticed. This is an older company, they've been around since the dawn of the internet. I think they're maybe in some ways one of the most stable Chinese stocks out there, yeah, I mentioned this before. I think you've got, to be encouraged by what's happening with Youdao, revenue up 54%. You see this chart here.

Then in July was when the crackdown on the Chinese tutoring sector, the government called for them to be basically after school tutoring companies become non-profit. That explains this plan here. But Youdao is pivoted pretty well to adult-learning and some other child learning products that are sanctioned by the government and that stock has rebounded and it's also where they traded.

Brian Withers: That piece of their business is not nearly as large as their video game.

Jeremy Bowman: Sure. [laughs] Let me fast-forward here. They released new games, Nakara: Bladepoint. I'm not a gamer, so some people out there might know these games, but that broke the sales records for buy-to-play games by Chinese developers and was also a top seller at Steam, which is a popular video game platform. Then Harry Potter: Magic Awakened was the top of the charts in IOS download. That's strong side, good momentum with new games. You have to like that and I should mention as well that their games are available globally.

In that sense, they're a global company. This isn actually the company an accompanying comment on this in their earnings report, the Wall Street Journal mentioned it that they are preparing their music streaming business for IPO in Hong Kong at an estimated evaluation of $5 billion to $6 billion and they expect to bring in $1 billion from that. That should give them another outlet for growth and bring in some cash. Yeah, I think the only real concern here, the company has done well in spite of the regulatory crackdown. How do I get it out of screen share?

Brian Withers: Hit the escape. There you go, the stop share button.

Jeremy Bowman: Yeah. Actually only 1%. The government's cracked down on some of the gaming providers but only 1% of their revenue comes from games targeted at minors, which is the area that the government's most concerned of and I think they've skated over those education issues pretty well too. I think that's an area to watch but all around I think it's a solid quarter and it seems like a safer stock than some of the other Chinese companies.

Brian Withers: Yeah. Especially since they've been around doing this for a long time.

Jeremy Bowman: Right, they don't have as high of a profile as Alibaba or Tencent either which I think helps.