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Can NetEase Keep Going After Last Week's 12% Pop?

By Rick Munarriz – Sep 20, 2016 at 12:13PM

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One of China's online gaming pioneers may be considering a spinoff or sale of its news operations.

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Investors continue to win at NetEase (NTES -1.50%). Shares of the Chinese online gaming giant hit another all-time high yesterday, and that follows an 11.7% surge last week.

Last week's pop was fueled by a Bloomberg report, suggesting that NetEase is considering spinning off its online news portal or selling it outright. Sources are telling Bloomberg that NetEase could raise roughly $300 million in the process, but they also say that the spinoff is still in the planning stage and that NetEase is just exploring talks with possible buyers of the dot-com darling's news operations. NetEase naturally didn't comment on the speculation. 

The move to raise $300 million through a U.S. offering could prove challenging. The U.S. tech IPO market has cooled considerably this year, and the climate isn't any kinder for Chinese growth stocks. (SOHU -1.96%) was able to spin off its online gaming business seven years ago without a problem, but this isn't 2009 when Chinese growth stocks were hot tickets. 

Spin cycle

NetEase and Sohu were among the first Chinese internet stocks to go public. Their businesses initially consisted of online portals and offering premium mobile value-added services. They both rolled out internet-based PC gaming businesses after the dot-com bubble popped and telcos began regulating third-party providers of mobile value-added services. 

Sohu spun off its gaming arm to focus on its portal and search engine business. If Bloomberg's sources are right, NetEase would be spinning off its news platform to throw more of its weight behind its thriving online gaming operations.

NetEase has quietly become one of the hottest stocks over the past decade. It has soared 2,000% -- a 21-bagger -- since being recommended to Motley Fool Rule Breakers subscribers in late 2004.

The company is earning those gains by consistently beating Wall Street expectations. It had another better-than-expected showing last month with revenue soaring 96% higher since the prior year's second quarter. Earnings also nearly doubled.  

Last week's pop was hopefully about more than that just the rumored spinoff. A stock doesn't tack on more than $3 billion in market cap just because it's clearing $300 million in unloading what has become a non-core asset. Momentum also likely played a starring role in the surge. NetEase has become a reliable growth stock. It even shells out a decent quarterly dividend, something that is rate among internet growth stocks and even harder to find in Chinese dot-com darlings. The spinoff or outright sale of its news operations isn't as big a story as the consistent success that NetEase has had in online gaming, and that's what is ultimately driving the stock to new highs and market-thumping returns.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends NetEase and We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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