In a note to clients today Pacific Growth Equities analyst Jason Brueschke expressed concern about Netease's (ticker: NTES) future gaming growth as the company guided for 12% - 15% sequential growth in Q3 down from 31% sequential growth in Q2. Here is a short extract:
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....As we have predicted, NetEase has now delivered two very strong quarters in a row, and we believe that Management should be commended. However, over the past 2 quarters, we have focused our efforts on looking at what was likely to be in store for NetEase in the second half of 2005. Our research as far back as April suggested to us that NetEase would likely face a deceleration in the rate of growth of its Fantasy and Westward Journey franchises heading into Q3. In our view, this has proven out to be true. We have also been concerned with the likely impact of Fatigue Systems on Q4 and 2006 estimates, and alas these new regulations now seem to be reality for Q4. Finally, we note that the online gaming landscape has become significantly more crowded, and that in our estimation, NetEase will likely have to spend significantly more on S&M in 2006 than the company has in 2005. There is no denying the Q1 and Q2 results, and admittedly, we think NetEase is a cheap stock. We can understand investors’ decision to buy the shares. However, the Q3 growth for the gaming business should give investors reason to pause, in our view, especially in light of what we believe are likely to be the causes of this slowdown. Because our cautious thesis on NetEase appears stronger now than last quarter, we are Maintaining our Equal Weight rating.
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