Earnings Tell The Story For NetEase, Inc. (NASDAQ:NTES) As Its Stock Soars 30%

NetEase, Inc. (NASDAQ:NTES) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 5.1% isn't as impressive.

Although its price has surged higher, it's still not a stretch to say that NetEase's price-to-earnings (or "P/E") ratio of 16.4x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 18x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been pleasing for NetEase as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for NetEase

Want the full picture on analyst estimates for the company? Then our free report on NetEase will help you uncover what's on the horizon.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like NetEase's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 151% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 9.3% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 10% per year, which is not materially different.

With this information, we can see why NetEase is trading at a fairly similar P/E to the market. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

What We Can Learn From NetEase's P/E?

Its shares have lifted substantially and now NetEase's P/E is also back up to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that NetEase maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You always need to take note of risks, for example - NetEase has 2 warning signs we think you should be aware of.

You might be able to find a better investment than NetEase. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.