NetEase Looks Like A Dividend Winner

| About: NetEase, Inc (NTES)

Summary

NetEase failed to hit expected revenue marks, which explains the recent pullback.

The company is on pace for continued revenue growth and increasing dividends.

If NetEase performs as analysts expect, payouts should increase significantly over the long-term.

NetEase Inc. (NASDAQ:NTES) appears to be a strong dividend investment for the long-term, and it's not too late to get on board the dividend train.

At the time of writing, shares of NetEase Inc. are down 2.9%, sitting at $277.70. This drop reflects the company's failure to meet revenue expectations in its latest quarterly report. Revenue fell short of analysts' expectations by $50 million. However, total revenue was up 38% year over year and earnings per share exceeded analysts' predictions, hitting $3.42. In other words, the pullback is a perfect example of overreaction.

NetEase began paying dividends in 2013, and although the dividend remains relatively low, its growth over the three year period is 33.2% CAGR. And if the company's growth continues at its present pace, dividends will increase. NetEase's advertising revenue jumped 23%, while ecommerce rose 107%.

NetEase makes games and is partnered with Activision Blizzard (NASDAQ:ATVI), one of the Big Boys in the world of games. NetEase launched Onmyoji, its 3D mobile game, in China, in early September 2016. Because of its visual and cultural elements, the game achieved over 10 million downloads in the first month. To put that in perspective, it took Slither.io 29 days to achieve 10 million downloads; Candy Crush Jelly Saga hit the 10 million mark in 12 days, while PokemonGo did it in 7 days; and Mobile Strike took 55 days to hit the same number. Thus, by any standard, Onmyoji's popularity is impressive

Games are even more popular in China than in the U.S. In October, Onmyoji was the number one game in China, by revenue.

In gaming, innovation is the name of the game. NetEase is in the vanguard of innovation for two reasons: 1) its move into the world of virtual reality and 2) NetEase is one of the first companies to commit to Daydream. In November, the company launched its VR game Twilight Pioneers. Twilight Pioneers' platform is Google's Daydream, which makes it compatible with all Android devices. Prior to that, in May 2016, NetEase launched Blizzard's game Overwatch in China. Overwatch was a hit, selling three million copies in the first month.

If that's not enough, NetEase is expanding its market, moving into South Korea and Japan, along with channeling new games into the hands of China's gamers.

As share price goes so go dividends. Analysts put NetEase's price target at $280, with Brean Capital's Fawne Jiang saying it will reach $310. At the present juncture, $310 may be conservative. If share price hits $310 or higher, dividends should increase accordingly over the long haul. The company's latest dividend, which will be paid this Friday, is $0.78, 1.37% for the year. Keeping in mind the three year CAGR of 33.2%, if NetEase performs as analysts expect, payouts should increase significantly over the long-term.

With the recent dip in price, now is an excellent time to invest in NetEase. Investors should get in now and look for the price to rebound above the $290 mark in the next sixty days, and $310 by the end of the third quarter 2017. Revenues should increase through 2017 into 2018, simply because of a steady flow of new games from NetEase coming to market. As NetEase's revenues grow, dividends will swell, realizing 3% for the year in 2017.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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