The Time Seems Right to Buy This Beaten Down Stock

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“But it ain't about how hard ya hit. It's about how hard you can get hit and keep moving forward.”

-Rocky Balboa

The above line applies perfectly to those who have their money invested in Chinese gaming company NetEase (NASDAQ: NTES). The last two quarters have been simply bad for the company. It missed estimates by a wide margin in the second-quarter that was reported back in August, and the story continued in the just-reported third quarter. The result – NetEase’s stock price has taken some serious beating, losing close to 20% over the last three months.

But, this doesn’t mean that NetEase can’t fight back. The company has enough ammo in its arsenal that could enable it to arrest its slide and help it move forward after taking a couple of body blows.

Shots in the Arm

Firstly, NetEase stands to gain from the success of Activision Blizzard’s (NASDAQ: ATVI) franchise World of Warcraft. Activision had released the Mists of Pandaria expansion pack for the popular game in the last week of September, and saw an improvement in subscribers in its first week. This suggests that Mists of Pandaria is off to a good start, which means good news for NetEase.

NetEase operates WoW for Activision Blizzard in China, and the game accounts for one-fourth of its top line. Since the expansion pack was released in the current quarter in China, NetEase should post better numbers next time, driven by the success of Mists of Pandaria.

In addition, it is expected that Activision Blizzard will choose NetEase as the operator for Diablo III in China. Diablo III has been a runaway success and if NetEase does land the deal, it will be a huge boost for its revenue.

A Pipeline Worth a Look

However, NetEase is also counting on its in-house games as well to drive its performance in the long run. Some of its self-developed games, such as Fantasy Westward Journey, Westward Journey Online II, Kung Fu Master and Soul of the Fighter have been doing decently. The company is focused on turning these games into blockbusters and ensuring their longevity through expansion packs, so that they become constant sources of revenue over the long-term.

Apart from these, NetEase has some more titles in the pipeline. It will be releasing Heroes of Tang Dynasty II on Nov. 16, which is a sequel to its popular predecessor. In addition, Heroes of Three Kingdoms, which is a 3D action real-time strategy game and Dragon Sword, a 3D MMORPG (massively multiplayer online role playing game) are also lined up for release in the near future.

Positioned to Grow

The company is a major player in the Chinese online gaming arena and ranks behind Tencent (NASDAQOTH: TCEHY), which itself missed estimates in the third-quarter. But Tencent was dragged down by a drop in advertising revenue, whereas growth in gaming revenue remained strong, suggesting that online gaming is doing well in the country.

With support from Activision’s WoW (and possibly Diablo III), NetEase looks poised to scale greater heights. Even though the company is dependent on Activision for a good chunk of its revenue, it is also working on its own games and they are faring well. Moreover, its strong pipeline of games point towards a better future. Online gaming in China is expected to grow at a fast clip over the next year and a half, and NetEase is positioned to move forward successfully even though it has taken a few hits of late.

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard and Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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