Have Investors Priced In NetDragon Websoft Holdings Limited’s (HKG:777) Growth?

NetDragon Websoft Holdings Limited (HKG:777) closed yesterday at HK$20.15, which left some investors asking whether the high earnings potential can still be justified at this price. Let’s take a look at some key metrics to determine whether there’s any value here for current and potential future investors.

See our latest analysis for NetDragon Websoft Holdings

Can we expect 777 to keep growing?

The excitement around NetDragon Websoft Holdings’s growth potential is not unfounded. Expectations from 8 analysts are extremely positive with earnings per share estimated to surge from current levels of CN¥1.024 to CN¥1.897 over the next three years. This results in an annual growth rate of 23%, on average, which indicates an exceedlingly positive future in the near term.

Is 777 available at a good price after accounting for its growth?

NetDragon Websoft Holdings is available at price-to-earnings ratio of 17.68x, showing us it is overvalued based on current earnings compared to the Entertainment industry average of 15.46x , and overvalued compared to the HK market average ratio of 10.03x .

SEHK:777 Price Estimation Relative to Market, August 21st 2019
SEHK:777 Price Estimation Relative to Market, August 21st 2019

We already know that 777 appears to be overvalued when compared to its industry average. But, to properly examine the value of a high-growth stock such as NetDragon Websoft Holdings, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 17.68x and expected year-on-year earnings growth of 23% give NetDragon Websoft Holdings a very low PEG ratio of 0.78x. This tells us that when we include its growth in our analysis NetDragon Websoft Holdings’s stock can be considered relatively cheap , based on fundamental analysis.

What this means for you:

777’s current undervaluation could signal a potential buying opportunity to increase your exposure to the stock, or it you’re a potential investor, now may be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Financial Health: Are 777’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has 777 been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of 777’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.