A Few Reasons Why NetEase's Rally Should Continue

| About: NetEase, Inc (NTES)

Summary

NetEase's strategy of keeping gamers engaged by releasing new content, along with new titles, should help it benefit from the online gaming market in China.

NetEase is focusing on popular genres such as 3D fantasy and first-person shooter with its new games.

NetEase is making smart moves in the mobile gaming market by integrating social functions into mobile games to increase engagement.

At the beginning of the year, Chinese online gaming company NetEase (NASDAQ:NTES) was in transition mode as its massively multiplayer online role-playing games, or MMORPGs, business was losing momentum. However, NetEase made a remarkable comeback in recent months, gaining more than 33% so far in 2014. Looking ahead, the company should be able to sustain this momentum on the back of its strong gaming pipeline, partnership with Activision Blizzard (NASDAQ:ATVI) and the expected growth of the Chinese online gaming market.

As I remarked in a previous Seeking Alpha article, the Chinese online gaming market will be worth as much as $40 billion in the next three years, almost double what it was in 2008. In addition, there were 338 million players of MMORPGs in China last year. As a result, NetEase's prospects look strong, as the company continues to follow a smart strategy of releasing new versions of its already popular games and new content via expansion packs.

New games and expansion packs will keep gamer engagement high

In line with its strategy, NetEase has released expansion packs for several games, including Kung Fu Master, Legend of Fairy, Tianxia III and Ghost II. The company will continue to introduce new characters and flash storylines for such games. This will help NetEase engage new users, apart from giving existing users more reasons to keep playing its games.

In addition, NetEase has lined up two more games for release before year end - Revelation, its 3-D oriental fantasy MMORPG, and Crisis 2015, its first-person shooter game. Now, 60% of gamers in China play 3D games, while first-person shooter games account for almost 30% of the overall gaming market. By focusing on these two genres, NetEase is expanding its addressable market.

NetEase will benefit from Activision Blizzard's Diablo III. NetEase operates Activision's World of Warcraft in China, and the addition of Diablo III to this list will increase its revenue opportunities further. Diablo III is a very popular game, having sold more than 20 million copies across the globe in August this year. When the game comes to China on NetEase's platform, along with the free-to-play online team brawler game Heroes of the Storm, NetEase should be able to strengthen its user base further.

Mobile is another catalyst

Meanwhile, the company is also focusing on mobile games. According to T.H. Capital, mobile game players in China increased 54% year-over-year in 2013 to 215 million. NetEase is building up its pipeline of mobile games as well. It has launched Mini Westward Journey, its first mobile card battle game. Recently, the company also introduced two new licensed mobile games, KONAMI World Soccer Collections and Ninja Must Die 2, along with its self-developed mobile farm business game, NetEase Farm.

To increase the popularity of its mobile games, NetEase has successfully integrated some of its mobile games with its social networking platform, YiChat. It has integrated exclusive and new social networking functions into YiChat, such as Rideshare and Crowd Ask. NetEase is also on track to launch other services such as an online payment system to its YiChat users by the end of the year, which means that it will be able to monetize its mobile games at a faster and more prolific pace.

Conclusion

NetEase has the required resources to continue investing in its games. The company has a strong cash position of $3.49 billion, while its debt is just $335 million. Its current ratio is also impressive at 4.31, signifying robust short-term liquidity. The company's valuation also indicates bottom line growth, as NetEase has a trailing P/E ratio of 18 and a forward P/E ratio of just 2.45. It is not surprising to note that NetEase's earnings are expected to grow at almost 13% per year for the next five years, as the company continues to benefit from the gaming market with its new games and expansion packs.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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