NetEase (NASDAQ:NTES): A Chinese Growth Stock to Add Now

Did you know that the value of the global video games market is expected to reach $138.4 billion in 2021? It’s an industry that is seeing strong growth all over the world and offers some very intriguing investing opportunities at this time. Things have come a long way over the years since the days of Atari and arcade games, and a lot of that has to do with the rise of the internet and mobile gaming. That trend is helping many companies reach new levels of success and providing some nice gains for long-term investors that are along for the ride.

One technology company based in China that offers investors exposure to online and mobile gaming looks like a great buy at the moment. NetEase (NASDAQ:NTES) started as a software development company back in 1997 and has since evolved into an internet technology company with a diverse business model. The stock is already up over 13% year-to-date and looks set to continue its strong start in 2021. Let’s take a deeper look at this Chinese growth stock below and discuss a few reasons why it’s a buy.

2^nd Largest Mobile Games Publisher in the World

When you consider just how many people own mobile phones in today’s tech-dominated world, it’s easy to understand the potential with a company like NetEase. It’s the second-largest mobile games publisher in the world by revenue and a company that has strong free cash flows which allow it to invest in growth opportunities. The stock also offers investors a 0.84% dividend yield at this time. Every smartphone has the potential to become a mobile gaming device, which means the addressable market for NetEase is huge. Since NetEase owns some of the most popular mobile games in China including four games that are in the “top 10 grossing games list” in the China iOS store, the company has already become a dominant player in the industry.

NetEase generates the majority of its revenue from its Online Game Services segment, which accounted for 78% of its revenue in 2019. However, NetEase also has an online education business segment called Youdao and an Innovative Businesses segment that includes things like a video streaming platform, an e-commerce platform, and a Cloud Music streaming service. These are all areas that could deliver earnings growth for investors over the long term. Look no further than the fact that NetEase’s recent cloud music concert by TFBOYS actually broke the Guinness World Record for most viewed paid concert after over 786,000 fans paid to watch. While mobile gaming is the backbone of this business at the moment, the company’s other businesses make it an even more compelling investment.

Recent Earnings Growth is Encouraging

NetEase has likely benefitted from recent circumstances given that the global pandemic has kept people at home and in need of entertainment to help pass the time. This has resulted in the company posting some encouraging earnings numbers for several quarters. In fact, the company’s year-over-year revenue growth has accelerated in three straight quarters. In Q3, net revenues increased by 27.5% year-over-year to $2.7 billion, largely driven by the company’s strong online game services revenues. NetEase also reported a strong gross profit figure of $1.5 billion, an increase of 25.6% year-over-year.

Another impressive figure from NetEase’s Q3 results was the 159% year-over-year increase in the company’s Youdao net revenues to $132 million. While this business segment only makes up a small portion of the company’s revenue, the triple-digit growth tells investors that the company’s learning services business is attracting plenty of interest. We know that the trend in remote learning should stick long after the pandemic has subsided, and the fact that NetEase has such strong growth there is promising.

Quality Video Games and Strong Pipeline of Future Releases

If you are going to buy a video game company, you want to own one that has a stable of quality games that people love to play. That’s especially true for a company like NetEase that generates a lot of its revenue from the sales of in-game virtual items and from licensing. NetEase has a reputation for providing quality gaming experiences thanks to its numerous successful self-developed games as well as popular licensed game franchises in its portfolio. Some of the company’s most popular self-developed games include its flagship Fantasy Westward Journey and Westward Journey series that are two of the largest and longest-running game IPs in China.

It’s also important to note that NetEase has licensing arrangements with massive video game companies like Activision Blizzard and Microsoft that allows it to launch exclusive titles in China. With a strong pipeline of games to be released in the near future including titles like Harry Potter: Magic Awakened, Diablo Immortal, and Pokemon Quest, investors should be attracted to NetEase’s tried and true games with loyal user bases and the upcoming titles that could drive sales growth as they launch.