This week's gone well for NetEase (NASDAQ:NTES) investors. Shares of the online Chinese gaming leader -- which we Fools singled out earlier this week as one of seven highly rated stocks on sale -- soared 10% on Wednesday, only to tack on another 5% gain yesterday.
Why all the excitement? Susquehanna Financial Group upgraded the stock on Wednesday, inspired by the initial buzz over the company's open beta testing for its Westward Journey Online III game. The analyst notes that NetEase had to nearly double the number of servers being used for the online fantasy role-playing game. Each server can accomodate roughly 3,000 players at once, and the game has gone from being hosted on 63 servers to 115.
It's a refreshing surprise for the company. NetEase has one bread-and-butter title -- Fantasy Westward Journey -- in its arsenal. Investors have mostly directed their attention at the title's continued popularity, as well as an expansion pack for the game due later this year.
Despite the similar names and themes, they are different games. Players taking to Westward Journey Online III won't necessarily cannibalize gamers on the company's flagship title. That's important, because NetEase could use a growth catalyst.
Revenue fell by 3% this past quarter. Pre-tax profits slipped by 9%. Gaming companies live and die by the product pipeline, yet NetEase investors have been burned there before. Tianxia II was supposed to be a winner earlier this year, but it tested poorly, so it was sent back to developers.
Online gaming is still in its infancy in China, so it's only natural for publishers there to make rookie mistakes and graze their knees from time to time. However, it's a promising industry, given the allure of leisurely pursuits like gaming and online connectivity as China's economy continues to skyrocket.
We'll get a better current snapshot of the industry when rivals Shanda Interactive (NASDAQ:SNDA) and The9 (NASDAQ:NCTY) post earnings this week, though this will expand into a market with many key players in the future.
If a second hit is the tonic to get NetEase growing again, it could have a dramatic impact on its share price. Even with the last two days of gains, NetEase is fetching just 14 times trailing earnings. Going by the $1.25 per ADS that analysts expect in profitability come 2008, NetEase is trading at less than 13 times next year's earnings target. That's half the multiple commanded by more conventional stateside publishers like Electronic Arts (NASDAQ:ERTS) and Activision (NASDAQ:ATVI).
NetEase firing on more than one cylinder would be a very impressive thing to watch.
NetEase and Shanda were recommended to Motley Fool Rule Breakers premium research newsletter subscribers a couple of years ago. Yes, they were that early. Electronic Arts and Activision are Motley Fool Stock Advisor picks. Find out how to play the growth-stock game with a free 30-day trial subscription to either service.
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. The Fool's disclosure policy does not condone goldfarming.
