I had two good reasons to expect a market-thumping report out of Chinese online gaming giant NetEase (NASDAQ:NTES). First, major China-based companies like Sohu (NASDAQ:SOHU), Baidu (NASDAQ:BIDU), and SINA (NASDAQ:SINA) have all recently reported quarterly results ahead of Wall Street's profit targets. Second, going into last night's report, NetEase had beaten analyst estimates for three consecutive quarters (and seven times out of the last eight at-bats).
Domination had the inside track -- and nailed it.
For the period, NetEase saw revenues rise 24% to hit $72.4 million. Profits clocked in 22% higher at $0.29 a share -- 32% higher to $0.31 a share, if you back out stock-based compensation. The pros were caught napping either way, since they expected NetEase to earn $0.28 a share on $72 million in revenues.
The company continues to improve in all three of its businesses (online advertising, wireless services, and Internet games). The online multiplayer fantasy games continue to be the bread and butter here, accounting for 82% of the company's top-line production.
The company is coasting along despite seasonal hiccups and an in-game protest of its flagship Fantasy Westward Journey role-playing game. Some activists -- "mistakenly" according to NetEase -- believed an in-game image to be a Japanese flag. The company also noted competition from companies like ShandaInteractive (NASDAQ:SNDA), which are turning older titles into free games, subsidized by ad revenue and virtual in-game inventory purchases.
As it stands, the pipeline at NetEase is strong. It has TianxiaII ready to roll out later this year, and its upgraded Fantasy Westward Journey III will begin beta-testing in the spring.
We can't dismiss things like price-cutting competitors or the impact of the Japanese-flag controversy just because the quarter turned out fine. Make sure to check back on the company in three months to see if there is any lingering fallout.
Still, respect the trends. Last night's report makes it four straight market-thumping quarters for NetEase. We already know how good NetEase is at playing games. Let's just hope that next time, the flag it's waving is the checkered banner of victory.
NetEase and Shanda have both been recommended as potential growth-stock opportunities to Motley Fool Rule Breakers subscribers, while Sina made the cut at Tom and David Gardner's Motley Fool Stock Advisor . Click the links to try either newsletter service, including total access to their archives and subscriber-only message boards, free for 30 days.
Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin gaming stocks for a long time. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. T he Fool has a disclosure policy.
