Global Game Launches And AI Investments Will Secure Future Success

Key Takeaways

• NetEase's international game expansion and diversified portfolio position it for future revenue growth and long-term stability.
  
• Strong cash position and share buybacks are likely to boost earnings per share and enhance shareholder value.
  
• Reliance on gaming revenue, coupled with execution risks and competitive international markets, threatens NetEase's revenue stability and growth despite new strategies.

Catalysts

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

• NetEase's strategy of expanding internationally by launching successful games like Racing Master and potential global releases like Marvel Rivals and Project Mugen suggests potential future revenue growth from new markets.
  
• The company's diversified game portfolio, including new game launches such as Where Winds Meet and the anticipated updates to existing titles like Naraka: Bladepoint Mobile, could lead to long-term revenue stability and growth.
  
• The partnership with Blizzard has rekindled player interest in popular games, and the strong active user growth indicates potential for increased revenue from these franchises.
  
• Investments in AI and innovative content for educational products and smart devices may enhance future earnings and improve net margins as these sectors grow.
  
• NetEase's robust cash position and ongoing share buybacks could lead to increased earnings per share, enhancing shareholder value.

NetEase Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NetEase's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.0% today to 27.6% in 3 years time.
• Analysts expect earnings to reach CN¥37.1 billion (and earnings per share of CN¥11.81) by about December 2027, up from CN¥27.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.6x on those 2027 earnings, up from 16.4x today. This future PE is greater than the current PE for the US Entertainment industry at 16.1x.
• Analysts expect the number of shares outstanding to decline by 0.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.07%, as per the Simply Wall St company report.

NetEase Future Earnings Per Share Growth

Risks

• There's inherent risk from relying heavily on gaming revenue, particularly with potential declines in player engagement or competition, which could affect NetEase's future revenue stability and growth.
  
• The introduction of new monetization models and attempts at international expansion might not successfully capture desired market share, impacting net margins and earnings.
  
• The complexities and uncertainties involved in game development, reaching new markets, and maintaining long-term player interest could result in execution risks, affecting profit margins.
  
• Changes in NetEase's product mix and monetization strategies potentially lead to fluctuations in profitability, indicated by the varying quarterly gross profit margins.
  
• The international gaming market is highly competitive, with risks from local regulatory changes and cultural differences that could impede successful global expansion, impacting overall earnings growth.

Valuation

• The analysts have a consensus price target of CN¥173.99 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 CN¥243.81, and the most bearish reporting a price target of just CN¥114.56.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥134.6 billion, earnings will come to CN¥37.1 billion, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 8.1%.
• Given the current share price of CN¥149.8, the analyst's price target of CN¥173.99 is 13.9% 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.