It was a brilliant third quarter for NetEase (NASDAQ:NTES), even if the market doesn't exactly agree. Shares of the Chinese gaming giant and online portal fell by 16% last night after the company posted its numbers for the September period.
Earnings per share more than doubled, soaring from $0.40 to $0.89. Revenues spiked 83% higher to $57.2 million. The bottom line growing quicker than the top line? Yes, that's right, we're talking fatter net margins here, too. Good luck finding a stateside company sporting 55.9% net margins.
However, the market's expectations had been bubbling for NetEase lately. Three months ago, analysts were perched at the $0.71-per-share mark. A month later, they were up to $0.83 per share. Last month, the average target had risen to $0.91 a stub. NetEase missed that sum by a pair of pennies, though it did come in slightly ahead of Wall Street's top-line projections.
The current quarter will also come in below the market's expectations. NetEase is expecting December-quarter profits between $31.4 million and $32.6 million. Based on the 36.3 million fully diluted shares outstanding, that represents earnings per share between $0.86 and $0.90. The consensus estimate stood at $0.95 per share. Revenue, targeted by analysts to clock in at just over $60 million, is now being guided down to a range of $56.9 million to $58.3 million.
Analysts' higher hopes sprang from the company's magnetic grip on the Chinese gaming market. Like fellow Rule Breakers pick Shanda Interactive (NASDAQ:SNDA), NetEase's multiplayer games allow players a dirt cheap way to escape into a world of fantasy. With as many as 827,000 folks playing Fantasy Westward Journey at any given time, the company claims that it has become the most popular game in the world's most populous nation.
Even after the after-hours slide, NetEase remains a stellar performer in Motley Fool Rule Breakers. Last night, the shares were trading 30% higher than when Rule Breakers recommended them 11 months ago.
The Chinese market offers great growth opportunities, but also risks. Companies like Baidu.com (NASDAQ:BIDU), Rule Breakers pick SINA (NASDAQ:SINA), and Sohu (NASDAQ:SOHU) have had their share of volatility in their brief public lives.
As for NetEase, yes, it proved mortal after blowing past the market's estimates over the past few quarters. However, if you set the expectations aside, you are still left with a fast-growing company in a region of largely untapped potential. Competition is growing, especially from The9's (NASDAQ:NCTY) World of Warcraft. With 614 million daily page views, NetEase is dealing with rising bandwidth costs as well. However, with last night's haircut, investors can now buy into this dynamic company for just over 20 times this year's earnings and roughly 16 times next year's profit forecasts. Take NetEase's war chest of $11 a share in cash into the equation, and those multiples drop a few digits lower, based on NetEase's enterprise value. That's more than reasonable, given NetEase's fiscal makeup.
If online gaming in a country with a population of 1.3 billion sounds like fertile growth terrain, you may be interested in our Rule Breakers ultimate growth newsletter service. If you pass on signing on as a subscriber -- or taking us up on a 30-day free trial -- keep an eye on NetEase anyway. The market has a way of rewarding heady growth in the long run.
Longtime Fool contributor Rick Munarriz believes in overseas investing, and he does own shares in Baidu.com. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
