A Few Reasons This Stock Should Have a Great Year Ahead

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After NetEase (NASDAQ: NTES) had posted yet another set of poor results in last year’s third quarter, many investors would have had lost faith in the Chinese gaming giant. But the bad times couldn’t have continued forever since NetEase has been continually improving its business.

Hence, the fact that NetEase delivered solid results in its recently reported fourth quarter shouldn’t come as a surprise to long-term investors who knew the stock’s underlying strength. Those who hadn’t panicked and exited their long positions were duly rewarded, as NetEase shares jumped almost 7% after earnings and have continued their northward journey ever since.

Going forward, there’s every possibility that NetEase will get better. The company is among the leaders in the booming Chinese online gaming industry, and follows a well-thought out strategy for improving revenue.

Riding WoW

NetEase is primarily known for operating Activision Blizzard’s (NASDAQ: ATVI) famous World of Warcraft franchise in China. This partnership has certainly been a fruitful one for NetEase given WoW’s popularity and its revenue-generation capacity.

WoW generates considerable revenue for Activision and the publisher has kept the franchise going over the years through expansion packs. Activision’s user base spikes after it releases a new expansion pack for the game, and the same helps NetEase. Hence, the release of Mists of Pandaria in late October was one of the reasons behind an 11.2% jump in online gaming revenue from last year, as the game added 2.7 million subscribers in its first week.

However, interest in the game probably waned as the December quarter progressed and Activision finished the quarter with 4% fewer subscribers for WoW due to decline in NetEase’s home turf. Hence, the publisher’s intention of pushing out another expansion pack wasn’t surprising and it plans to do so in the next few weeks. As a result, it is expected that NetEase will once again find a new WoW expansion pack pushing up its revenue in the near future.

Moving well

But NetEase isn’t just relying on Activision Blizzard’s famous franchise to drive revenue, as it has already been bitten in the past after the publisher decided to go with Tencent for operating Call of Duty Online in China. NetEase is highly focused on its own in-house games, and the efforts are bearing fruit.

Self-developed games, such as the recently-released Kung Fu Master and Heroes of Tang Dynasty II, drove NetEase’s top line higher. Going forward, the company has lined up a number of games and expansion packs for 2013. It would provide another breath of life to some of its best performing games, such as Westward Journey Online II, Tianxia III, Kung Fu Master and many more in the coming quarters.

Apart from the above, it plans to release titles such as Heroes of Three Kingdoms, a real-time 3D action strategy game, Dragon Sword and Legend of Tibet in the second half of 2013. These efforts signal a concerted effort by NetEase to diversify its revenue sources and help it get better in the future.

Speaking of diversification, the company’s advertising business has also been on the rise of late. Advertising revenue grew almost 7% in the previous quarter on a sequential basis. Although this segment contributes just 11% to NetEase’s revenue, the company plans to make it better by offering better services and focusing on mobile initiatives.

The takeaway

NetEase is looking to get better through the course of 2013, and it won’t be surprising if the stock continues to get better as the year progresses. What’s more, potential investors don’t need to pay a fortune if they intend to buy into this Chinese online gaming play. A trailing P/E multiple of just 11.5 times and a PEG ratio of less than 1 suggest that the stock is inexpensive and there’s growth lying ahead. Moreover, a forward P/E of just 9.3 times is another reason why you should take a look at NetEase.

The company’s focus on making its self-developed games successful and the presence of a solid, money-generating franchise such as WoW is a potent combination that should help NetEase perform better as the year progresses. What do you think?

TechJunk13 has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and NetEase.com. The Motley Fool owns shares of Activision Blizzard. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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