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Why NetEase.com Shares Got Crushed Today

By Evan Niu, CFA - Feb 25, 2016 at 12:40PM

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The game maker sees margin pressure from its latest revenue growth driver.

Image source: NetEase.

What: Shares of Chinese online game maker NetEase (NTES 0.12%) got crushed today, down by 15% as of 1:15 p.m. ET, after the company reported fourth-quarter earnings and saw margins fall.

So what: Fourth-quarter revenue added up to $1.2 billion, which includes $849.5 million in revenue from the core online games business. Gross profit was $651.4 million, and NetEase attributed growth to mobile games like Fantasy Westward Journey and its Westward Journey Online mobile games, in addition to several licensed titles. Net income came in at $334.1 million, or $2.52 per share.

Now what: But that growth from mobile games is proving to be a double-edged sword. Gross margin within the online games segment contracted significantly to 67.2%, down from 76% a year ago, due to the "increased revenue contribution from mobile games." CEO William Ding noted that while PC games remain important to the gaming industry in China, mobile is quickly becoming increasingly important as well, and NetEase continues to invest in mobile platforms. The company now has over 80 high-profile games in its mobile portfolio.

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