Park's recent spoof of the popular World of Warcraft online game stereotyped gamers as consumers of an addicting virtual interface: one that requires complete commitment (ignoring hunger and the call of nature) to the game to build character powers and yes, even outfits. While this may or may not ring true, it does bring the steadily growing gaming trend into the mainstream -- a move that Chinese company NetEase.com
NetEase serves Chinese gamers with an online portal including popular titles such as Westward Journey Online II and Fantasy Westward Journey. But NetEase also houses China's largest free email service, news stories, blogs, shopping, and more. You name it, and NetEase probably has it, without the whole peanut butter problem. But despite the site's broad array of services, let's focus on gaming; it's the source of more than 80% of NetEase's profits.
Let the games begin
Even if you're not a gamer, the stats speak for themselves. NetEase is currently the top Chinese online game operator in the soon-to-be-largest Asian gaming market, surpassing South Korea. With a product pipeline that includes the "best of breed 3-D MMORPG" (massively multiplayer online role playing game) TianxiaII, and the release of Fantasy Westward III in 2007, continued subscriber growth is pretty much guaranteed. Furthermore, founder and CEO William Ding has vowed to devote more than $400 million to develop new games over the next few years.
As of September 2006, NetEase averaged 535 million daily page views, making it one of China's most visited websites. Its popular Westward Journey Online II has brought in more than 83 million registered users and counting to become China's most popular domestically produced online game. When you take into account that China's Internet and broadband markets are the world's second-largest at 123 million users, rising 20% year over year, it seems the company's opportunity has just leveled up.
If those numbers don't impress you enough, NetEase also boasts incredible growth and margins. According to Capital IQ, NetEase's revenues boast a five-year compounded annual growth rate of 218%. The company's gross margin tops 80%, and both operating and net margins hover near 60%. Free cash flow remains healthy at almost $37 million.
Earlier this year, NetEase dominated the Chinese online gaming market, with 38% market share based on revenue. Its stiffest competition came from The9
As the online gaming landscape becomes more competitive, NetEase is also focusing on its second-largest revenue driver: online advertising, a segment that's expected to grow more rapidly than traditional advertising in China. The company's Q3 online advertising revenue expanded 14% year over year, and 21% over Q2, to total more than $10.5 million. By continuously introducing new products like NetEase's new blog service, and launching a new home page, the company is expanding the ways users can interact with its services. That should drive more traffic toward the company's website, which should in turn bring in more advertising revenue.
NetEase is a winner. With a strong record over four quarters, sizable growth opportunities, and a 489% return to investors since going public in June 2000, NetEase is the best international stock of 2007. (Find more of the world's best stocks.)
Our current Motley Fool CAPS community is also overwhelmingly in favor of NetEase, with 127 of 135 community members believing that NetEase will out-game the S&P 500. If you agree, get in the game with our CAPS online database. You'll have the opportunity to rate whether you think stocks such as NetEase will outperform or underperform against the S&P 500, read helpful user commentaries from almost 14,000 participants, and track your own success.
As SouthPark's Eric Cartman put it, "You can just hang outside in the sun all day tossing a ball around, or you can sit at your computer and do something that matters."
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Foolish fact-checker Katrina Chan does not own shares in any company mentioned. While she does spend a significant amount of time online, none of it is devoted to online gaming. She is currently ranked 597 of 13,842 community members in CAPS. Both NetEase.com and Shanda Interactive are Motley Fool Rule Breakers recommendations. The Motley Fool's disclosure policy doesn't play around.