When asked to name the leading internet companies in China, investors typically think of Alibaba Group and Tencent. However, alongside these two giants there are other well-established yet lesser-known internet companies that have thrived. One such company is NetEase (NTES 1.99%). Since its initial public offering in 2000, its stock has delivered an astounding return of 16,059% to investors, turning every $1 invested into $160.59.
Let's look at two crucial aspects of NetEase that savvy investors are already familiar with, which will provide new investors with a better understanding of the company.
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NetEase operates a diverse business model
Founded in 1997, NetEase transformed from a basic web portal offering services like news and email into a digital behemoth with a broad array of services. These services span gaming, e-commerce, online learning products, music, and more.
Notably, the cornerstone of NetEase's business is its online gaming segment, with more than140 mobile and PC games across various genres offered to customers in China and overseas markets. Approximately 90% of gaming revenue is generated from self-developed games, such as Fantasy Westward Journey, with the remaining 10% from licensing arrangements. Collectively, gaming revenue represented 77% of NetEase's 2022 revenue, totaling 74.6 billion yuan, or $10.8 billion.
The second-largest revenue contributor is NetEase's cloud music business segment, accounting for 9% of its 2022 revenue. NetEase Cloud Music provides community-centric online music services and social entertainment, with 189 million monthly active users in 2022.
Additionally, NetEase offers learning services under the brand Youdao, contributing 5% of its revenue. Leveraging its initial success with Youdao Dictionary and Youdao Translation, this segment now includes STEAM courses, adult and vocational courses, and smart devices to cater to lifelong learning needs.
Finally, NetEase operates in various other ventures, including e-commerce, internet media, and email services, collectively forming the other innovative business and services segment. This segment contributed 8% of its 2022 revenue. This diversified business model reduces NetEase's reliance on a single product while opening up new growth opportunities.
NetEase has a founder CEO at the helm
Another important aspect of NetEase is its management team, predominantly led by founder and CEO William Ding. Ding has been actively involved in the company since its inception, assuming various roles, including chief operating officer and chief technology officer. Notably, he is the largest shareholder, holding a 45% stake in the $66 billion company.
Ding's presence has been beneficial for NetEase's long-term development. Founder CEOs often possess a strong vision for the company and a deep passion for its mission, which can inspire employees, foster innovation, and create a sense of purpose throughout the organization. Moreover, Ding's substantial ownership stake aligns his interests with the company's long-term success, reducing the inclination to prioritize short-term gains over the company's long-term well-being and reputation.
Moreover, Ding demonstrated adaptability and resilience as the company expanded over the decades. For example, he successfully navigated the company through a fraudulent revenue reporting crisis in the early 2000s, replacing key management members to ensure its survival and its eventual ascent. He has also been instrumental in leading the company into new business areas, building a diversified internet company with multiple sources of income.
The best way to illustrate Ding's success is to examine NetEase's financial performance over close to a quarter of a century. In 2000, NetEase had revenue of 30 million yuan and a net loss of 169 million yuan. Fast forward to 2023, and revenue and net income for the second quarter of 2023 was 24 billion yuan and 8.2 billion yuan.
Ding has proven himself as a capable and visionary leader. His ongoing involvement in NetEase will likely keep the company moving in the right direction for years to come.
