Digital Entertainment And Gaming Will Fuel Global Expansion

Key Takeaways

• Strategic global expansion and innovation in gaming diversify revenue, enhance user engagement, and support long-term earnings stability.
  
• A focus on original IP, AI-driven marketing, and higher-margin self-developed games strengthens profitability and resilience against market fluctuations.
  
• Heavy reliance on the Chinese market and execution risks abroad, combined with rising costs and industry competition, threaten NetEase's revenue diversification and margin stability.

Catalysts

Engages in online games, music streaming, online intelligent learning services, and internet content services businesses in China and internationally.

• NetEase is accelerating global expansion with self-developed and licensed games that have performed strongly in overseas markets (e.g., Marvel Mystic Mayhem, FragPunk, Once Human, Eggy Party), which is increasing the company's addressable market and diversifying revenue streams beyond China, supporting higher long-term revenue growth and earnings stability.
  
• Rising adoption of digital entertainment and online experiences-including increasing global internet connectivity and smartphone penetration-continues to boost demand for NetEase's core gaming and music businesses, laying a foundation for sustainable top-line growth and robust user engagement.
  
• The company is demonstrating margin improvements (e.g., games and related VAS gross margin rising to 70.2%) due to a shift toward a higher proportion of revenue from self-developed games, which enhances profitability and resilience of net margins over time.
  
• NetEase's ongoing investment in innovation-such as frequent content updates for evergreen titles, development of new original IP, and leveraging AI for more precise marketing and product development-supports longer game lifecycles, deeper user engagement, and increases visibility for future revenue and margin expansion.
  
• The global launch pipeline for major new games (Sea of Remnants, Blood Message, ANANTA, licensed Blizzard titles returning to China) positions NetEase to capture additional discretionary spending from the growing global middle class, particularly in Asia, driving both future revenue and potential operating leverage as these titles scale.

NetEase Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NetEase's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.2% today to 31.1% in 3 years time.
• Analysts expect earnings to reach CN¥43.2 billion (and earnings per share of CN¥14.17) by about August 2028, up from CN¥34.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CN¥35.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.3x on those 2028 earnings, up from 17.2x today. This future PE is greater than the current PE for the US Entertainment industry at 18.8x.
• Analysts expect the number of shares outstanding to decline by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.43%, as per the Simply Wall St company report.

NetEase Future Earnings Per Share Growth

Risks

• NetEase's overseas revenue concentration remains low-games like Once Human have achieved a 50/50 split in user numbers between China and international markets, but revenue outside China is only 2–3%, highlighting execution risk in global expansion and the company's heavy dependence on the slower-growth Chinese market, which may constrain topline diversification and future revenue growth.
  
• NetEase's increasing investment in R&D and ongoing content development-evidenced by commitments to expensive, high-quality updates, pioneering new titles, and long-term franchise extensions-risks pressuring operating expenses and compressing net margins if new releases and expansions do not consistently achieve scale or resonate with global audiences.
  
• The company faces intense competition and genre saturation, especially in areas like tactical shooters and cross-platform RPGs, where entrenched global rivals and hit-driven consumer preferences could lead to shorter game lifecycles, user fatigue, and declining revenues for both new and existing franchises.
  
• Regulatory uncertainty and rising scrutiny in the domestic Chinese market, as well as in key overseas territories, continue to present risks-license delays, changes in monetization requirements, or privacy/data restrictions could inhibit growth momentum and impact both revenue and earnings stability.
  
• Evolving entertainment consumption patterns, such as the rapid rise of alternative digital formats (short-form video, streaming platforms, and virtual influencers), may siphon user engagement and spending away from NetEase's traditional and core gaming offerings, negatively affecting future revenue streams and long-term growth trajectory.

Valuation

• The analysts have a consensus price target of HK$232.83 for NetEase based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$266.32, and the most bearish reporting a price target of just HK$117.2.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥139.2 billion, earnings will come to CN¥43.2 billion, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of HK$202.2, the analyst price target of HK$232.83 is 13.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.