Piper Jaffray's Safa Rashtchty released a note on NetEase (ticker: NTES) earlier today. Key extracts:
Gaming Growth Continues. NTES' strong Q4 results, showing 8%q/q growth in its core gaming business, renews our confidence and has mitigated fears that the company's two main titles had reached the end of their life cycles. Contrary to expectations, both Fantasy Westward Journey and its older Westward Journey Online II showed growth in Q4, and early analysis of January and February data suggest that this growth is continuing in 2006.
Pipeline On Track. NTES' next-generation games, DaTang and Tianxia, look to launch in late Q2 and early Q3, respectively. Although this is still behind the company's early 2005 predictions, it is on track with Q3 guidance minimizing our most serious concerns. We expect both games to be meaningful growth drivers in the second half of 2006 and should pickup the growth just as WJOII starts to decline and FWJ peaks.
Raising Estimates. We are raising our 2006 net revenue estimate by 6%from $264.9M to $281.3M while raising our GAAP EPS estimate from $3.97 to $4.11. Our new GAAP EPS estimate includes $12.8Min non-cash stock-based compensation under FAS123R, which if excluded would lead to proforma EPS of $4.45in2006. Additionally, we are publishing 2007 estimates of $356.0M in net revenue (up 27%y/y) and$ 4.96 and $5.29 in GAAP and proforma EPS.
Upgrading to Outperform. NTES' ability to reignite growth after a troubling Q3 renews our confidence in the company's ability to deliver the quality content demanded by Chinese gamers. This better-than-expected growth combined with improved confidence in the on-time launch of the company's upcoming titles has made us more positive on NTES' prospects. Although there is still a risk that these new games do not capture the attention of Chinese gamers, or they cost more to market, we believe this risk is minimized by NTES' proven track record of producing popular games. We are raising our rating to Outperform and increasing our price target from $72 to $93.