One would think that with its phenomenal growth and jaw-dropping profit margins, NetEase.com
Revenue rose by 58% on the strength of a 31% year-over-year spike in advertising revenue and a gargantuan 135% surge in its online gaming business. Even though the stock is barely beating the market since its recommendation in our Rule Breakers newsletter service, the future looks bright for the company, given the region's potential and improving economy.
Online gaming is where it's at for NetEase these days. It has been weaning itself off its declining mobile phone entertainment services, the trough from which Sina
NetEase hasn't minded, since online gaming is where the real growth lies these days. Last month, the company had as many as 588,000 users playing its Fantasy Westward Journey game at the same time. The sequel hasn't been doing too bad, either, drawing as many as 389,000 concurrent users at its March peak.
Yes, China is a big country, but those are still huge numbers. Think Electronic Arts
Plenty of companies are looking to cash in on China, a country coming into its own in terms of entertainment and growing disposable income. But there are few publicly traded plays in this hot market. Thankfully, though, they all bear watching. The9
But let's get back to NetEase. Analysts were expecting the company to earn $0.45 on each American Depositary Share, and it blew past that mark by $0.08. Wall Street was looking for the current quarter to produce $0.53 a share in earnings, and the company is now guiding its investors to expect profits to come in closer to $0.65 a share.
While bottom-line estimates that have the company earning as much as $2.70 a share this year seem a bit optimistic, they no longer seem unreasonable. The mean estimate for this year of $2.24 is already obsolete, now that the company will have blown past Wall Street's expectations by $0.20 a share through the first half of the year alone.
Revisions will now have the company trading closer to 20 times this year's earnings. Given its explosive growth and its amazing 47% -- yes, 47% -- in net profit margins, is NetEase worth a leap of faith? I think so. The risks are as obvious as they are substantial, but then again, so is the potential.
More about China:
- We were excited about the region a couple of years ago.
- Like NetEase and Shanda? Come and see what else the Rule Breakers team is unearthing these days.
- Talk about the investing potential in our China Connection discussion board.
Longtime Fool contributor Rick Munarriz believes in the sector, but he does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.