One of the most essential tenets of conservative stock investing is enough portfolio diversification to offer both upside opportunity and downside protection. You can diversify your portfolio in many ways, including by holding different asset classes and by investing in companies from other industries.
Beyond these well-known strategies, another method of portfolio diversification is to hold overseas stocks. This reduces risks associated with individual countries and gives you exposure to emerging market growth opportunities.
In this article, we will discuss one overseas stock that investors could consider, including in their watch lists -- NetEase (NTES 1.99%).
Image source: Getty Images.
NetEase has a solid execution track record
NetEase is a little-known but highly successful technology company in China. Founded in 1997 as a web portal providing basic services like news and email, NetEase has, over the years, evolved into a conglomerate with businesses across gaming, online learning, e-commerce, music, and other areas.
NetEase's long operating history indicates that the company can adapt to external changes to remain relevant to its users. It launched new products and entered new businesses over the years, evolving from a desktop-based internet company to the current smartphone-based diversified internet conglomerate. In short, NetEase is a rare performer in the rapidly changing internet industry, where casualties are more common than survivors.
NetEase did not just survive, but thrived over the decades. To put it into perspective, let's consider a few headline numbers. In 2000, NetEase had revenue of 30 million yuan and a net loss of 169 million yuan. But in 2022, revenue and net income reached 96.5 billion yuan ($14.0 billion) and 20.3 billion yuan ($2.9 billion), respectively. As of 2022, 77% of NetEase's revenue came from gaming, while the rest was from cloud music, learning services, and other ventures.
NetEase solid execution track record, spanning more than two decades, shows the company knows how to grow sustainably over the long term. In the future, it can expand its existing Chinese operations -- in areas such as gaming, e-commerce, and cloud music -- or expand more aggressively in overseas markets. And with its massive war chest (more on this in the next section), NetEase is in a prime position to keep investing in growth.
NetEase has a solid financial position
Any potential investment candidate should have a stable financial position. A solid balance sheet ensures the company's stability by providing the means to cover its liabilities, which is essential for uninterrupted business operations. Besides, a healthy balance sheet allows the company to adapt to external challenges, such as an economic downturn, and take advantage of unexpected opportunities. More importantly, robust financial health enables a company to invest in growth and expansion without reliance on external capital.
NetEase has 99.6 billion yuan ($13.7 billion) in total cash and cash equivalents, current and noncurrent time deposits, restricted cash, and short-term investments balance, excluding short-term and long-term loans. Besides, its strong cash flow generation capacity -- it generated 27.7 billion yuan ($4.0 billion) in operating cash flow -- continuously adds to this cash position.
With such a robust financial position, NetEase has no problem weathering short-term challenges to focus on its long-term strategic plans. For instance, it can sustain its investment in research and development or explore new businesses during economic downturns. That flexibility puts it in a favorable position to generate sustainable growth and create long-term shareholders' value.
NetEase is a stock to watch
Diversifying an investment portfolio with overseas stocks is a wise strategy for investors seeking to manage risk and seize new opportunities.
Still, investors must be very selective with overseas companies, focusing only on those with proven track records, good prospects, and solid balance sheets. NetEase fits that description nicely.
