What happened
Week to date, shares of NetEase (NTES -1.91%) were up 4.4% as of 10:21 a.m. ET on Friday, according to data provided by S&P Global Market Intelligence.
The stock has fallen 33% year to date. The Chinese game services provider delivered earnings results that fell short of expectations. In other news, Activision Blizzard announced it was suspending game services in China after failing to extend its licensing agreement with NetEase. Should investors be concerned?
So what
NetEase is one of China's leading game service providers and has held a licensing agreement with Blizzard Entertainment to publish certain titles in China, including Diablo, World of Warcraft, Hearthstone, Overwatch, Warcraft III, and the StarCraft series.
Market traders are assuming this development will create a void for the business, but Blizzard's titles are only a tiny part of NetEase. In fact, the company's rights to publish Blizzard's Diablo: Immortal mobile game is covered under a separate operating agreement and won't be impacted.
NetEase said revenue grew 10% year over year in the third quarter, with games and related value-added services making up about-two thirds of the top line. Specifically, Blizzard's titles contributed a low-single-digit percentage of NetEase's revenue and profit.
Data by YCharts
Now what
Whether the market sold the stock off for the Activision news or the earnings results, the sell-off appears excessive. NetEase will be fine without Activision's games, and the company's third-quarter financial results were better than the market is giving it credit for.
The double-digit revenue growth looks solid in a weakening global economy, particularly for mobile. Management has a diversified portfolio of games to drive long-term growth, and the company is positioning to further expand its gaming services around the world. NetEase has been repurchasing shares and pays a regular dividend to shareholders, which signals a good buying opportunity.
