Marvel Rivals And Where Winds Meet Releases Will Drive Global Expansion

Key Takeaways

• Strategic focus on innovation and global expansion could increase revenue, market reach, and reduce dependency on traditional offerings.
  
• Successful game launches and Blizzard's return to China are likely to drive future revenue growth and profitability.
  
• A shift towards licensed games, a decline in innovative segments, and organizational changes pose risks to NetEase's revenue growth and profitability.

Catalysts

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

• NetEase's strategic focus on innovation and global brand awareness is expected to foster sustainable long-term growth, potentially increasing revenue and expanding their market reach.
  
• The successful launches and ongoing expansion plans for games like Marvel Rivals, Where Winds Meet, and other titles highlight NetEase's ability to capture wide player interest, which could drive future revenue growth.
  
• The return of Blizzard Games to China offers significant enthusiasm and revitalized engagement, likely enhancing NetEase's revenue and profitability from existing popular franchises.
  
• Efforts in diversifying their portfolio, such as with the new titles Fragpunk and Destiny: Rising, and strengthening their global presence are expected to introduce new revenue streams and reduce dependency on their traditional offerings.
  
• Ongoing improvements in marketing efficiency and strategic content updates demonstrate a focus on cost management, which could lead to improved net margins and profitability over time.

NetEase Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NetEase's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.2% today to 28.3% in 3 years time.
• Analysts expect earnings to reach CN¥37.2 billion (and earnings per share of CN¥11.88) by about April 2028, up from CN¥29.7 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CN¥42.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, up from 16.1x today. This future PE is greater than the current PE for the US Entertainment industry at 14.0x.
• Analysts expect the number of shares outstanding to decline by 1.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.08%, as per the Simply Wall St company report.

NetEase Future Earnings Per Share Growth

Risks

• The decrease in gross profit margin for games and related value-added services is attributed to higher revenue from licensed games, which typically carry lower margins than self-developed titles, potentially impacting overall net margins.
  
• A significant decrease in net revenue from innovative business segments, including Yanxuan and advertising services, indicates potential challenges in maintaining diversified revenue streams, which could affect total revenue growth.
  
• In the fourth quarter, the decline in learning services revenue at Youdao suggests possible difficulties in sustaining revenue in this segment, even as the company focuses on long-term growth and profitability strategies.
  
• NetEase Cloud Music experienced a 5% decrease in revenue year-over-year for the fourth quarter, reflecting a refined focus on profitability that reduces revenue from social entertainment services, potentially constraining growth in this unit.
  
• Organizational changes in both domestic and overseas studios could introduce execution risks, particularly if the resource allocation and project management adjustments disrupt the product development pipeline, potentially impacting future earnings.

Valuation

• The analysts have a consensus price target of HK$183.425 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$245.56, and the most bearish reporting a price target of just HK$115.75.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥131.4 billion, earnings will come to CN¥37.2 billion, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 9.1%.
• Given the current share price of HK$160.7, the analyst price target of HK$183.43 is 12.4% 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.