I am bullish on NetEase (NTES).
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This company has a strong tailwind from the 11.2% CAGR (2019-24) of the $90.7-billion mobile games industry.
This company’s stock is trading at 28.9% discount to its 52-week high of $134.33. (See Insiders’ Hot Stocks on TipRanks)
Games Monetization Is Safe
The Chinese government’s limit on minors’ game time is not a headwind. NetEase made it clear its video games generate less than 1% sales from children.
Going forward, the limit on kids’ video games hours is not going to impact NetEase’s five-year average revenue CAGR of 20.4%. More than 80% of mobile gamers are adults.
What matters most is NetEase’s high-growth stock status. As long as China does not limit the playtime of its adult population, expect NetEase to keep on growing its $11.3-billion annual revenue by 20% or more.
Games based on Harry Potter and the Lord of the Rings IPs will help NetEase improve on its latest quarterly revenue of $3.2 billion.
The mobile version of Dead by Daylight is still under beta testing. This is also true for Racing Masters. NetEase is also developing an FPS mobile game called Project M. It is based on the concept of the hit PC game Valorant.
The excellent profitability of NetEase is thanks to its continuous development, and releases of new games. The TTM net income of NetEase is $1.9 billion.
Catalyst from Cryptocurrency Gaming
NetEase has embraced the NFT (Non Fungible Token) cryptocurrency gaming industry. NetEase released its Forever Tribulation game with support for NFTs.
Forever Tribulation’s cryptocurrency gaming focus is similar to Wemade’s Mir 4. Players of Mir 4 that own level-40 characters can earn and trade in-game cryptocurrency called Draco. Draco can be cashed-out for real money.
NetEase could be a great growth stock because cryptocurrency mining is done by active human players, not by computers. Global NFT quarterly sales volume is already $10.7 billion.
NetEase is an affordable growth stock. Its forward P/E is only 23x, and its TTM price/sales is 4.3x.
Wall Street’s Take
The consensus among Wall Street analysts is that NTES is a Strong Buy, based on six Buy recommendations. The average NetEase price target is $124.33, indicating 30.2% upside potential.
Conclusion
NetEase is an excellent growth stock.
The video game-centric business model is highly profitable, and has no China headwind.
Disclosure: At the time of publication, Motek Moyen did not have a position in any of the securities mentioned in this article.
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