NetEase dominates the gaming sector, but is the stock price still undervalued? What are the admission prospects at this time?

NetEase has a large number of mobile gaming products, and these games generate more than 80% of its revenue.

The company is diversifying into other industries, such as education services, to increase its market share.

This article focuses on analyzing the company's fundamentals, the comparison between actual value and current stock prices, and whether NetEase is currently worth investing in.

Since its inception, mobile gaming has revolutionized the entire industry. NetEase (NASDAQ: NTES) has a large number of mobile games, which contribute more than 80% of its revenue. The company's gaming business continues to grow every year. NetEase is also diversifying into other fields such as education services through Youdao products.

Youdao's current performance is mixed, but it shows that the company is willing to diversify its products and try to gain market share in other industries that remain its core competitiveness. Even if expansion to other markets (such as the Western gaming market) fails, the company maintains a diverse mobile game portfolio, and new games with high potential are being developed to continue to drive growth. When considering these current stories about NetEase, we need to determine which news topics will have a long-term and lasting impact on the company and its share price. NetEase has a solid mobile gaming portfolio that generates high revenue and high gross profit margins. The company is also investing in expansion and growing revenue through its various types of mobile games.

The company is not without problems, regulation may still affect the company's profits, and investing in PC gaming in Western markets is no guarantee of success. With the exception of regulatory issues, most of the news about the company remains positive and paints a positive outlook for the company.

This article will focus on the company's long-term fundamentals, which often provide us with a better picture of the company as a viable investment. I'll also analyze the company's values and prices to help you determine whether NetEase is currently trading at a discounted price. I'll provide a variety of situations to help estimate the company's future returns.

Finally, I'll tell you if I'm personally interested in investing in this company and why.

Using BTMA Stock Analyzer's company rating scores is an effective way to quickly understand how a company is doing. NetEase's rating score is 85.625 out of 100, indicating its strong fundamentals.

Before we draw conclusions, we need to take a closer look at each category's specific situation.

Over the past 9 years, the stock price has shown a fairly steady upward trend. This is in line with steady revenue growth and the continuous release of successful mobile games. The company has demonstrated outstanding expertise in the field of mobile gaming. As the company continues to expand and release new mobile games, I expect growth to continue. As long as regulation does not cause stock prices to plummet, this upward trend should continue.

I don't think changes in customer gaming preferences or market saturation will have a significant impact on the company's development trajectory. Overall, in the past 10 years, the stock price has increased by an average of about 336.89%, with a compound annual growth rate of 17.8%. That's an impressive return.

As the stock price rose, the company's earnings continued to grow. This was driven by increased revenue and profits. Had it not been for the surge during COVID-19, the current earnings per share (EPS) would have reached a record high.

In addition to regulation, new privacy rules could drive up user acquisition costs, leading to lower earnings per share. Currently, NetEase has not been affected in this regard, but privacy is still an important area of government intervention and requires attention in the short term.

Since earnings per share and share price do not fully reflect the company's condition, there are other factors to look at, such as gross profit margin, return on equity, and return on invested capital.

Return on equity (ROE) has declined in recent years. This is mainly due to the company retaining profits and not using them for dividends or investments. While having the company hold untapped earnings isn't an ideal situation, as a leader in this field, you probably don't need to invest a lot of money right now. I hope the company continues to expand its gaming product line to increase ROE. For ROE, I usually require a 5-year average of 16% or more. As a result, NetEase surpassed this standard.

Let's compare NetEase's ROE to the industry average. 84 software entertainment companies have an average ROE of 23.26%.

As a result, NetEase's 5-year average ROE is 21.89%, which is similar to the industry average.

NetEase's return on invested capital (ROIC) has declined from an all-time high. This may be worrying, but after considering the unusual years during the pandemic, the chart shows an upward trend. Capital expenditure has increased steadily in recent years, and after removing outliers, the ROIC is still higher than in previous years. Overall, I think ROIC is a good indicator for the company, showing that the company is doing well in terms of investment.

For ROIC, I'm also asking for a 5-year average of 16% or more. As a result, NetEase surpassed this standard.

NetEase's gross margin percentage (GMP) has increased in recent years and has remained at a high level. The continued excellent performance of gross margin shows that NetEase has performed well in terms of return on profits. The increase in gross margin was mainly due to games developed independently by the company, which reduced outsourced development costs. I expect this trend to continue as the company has advantages in terms of core competitiveness and cost control.

I usually look for companies with a stable gross margin ratio of 30% or more. NetEase therefore complies with this standard.

Judging from other fundamentals of the balance sheet, NetEase's debt-to-equity ratio is less than 1, indicating low long-term debt and the ability to raise more capital when needed. NetEase's current ratio is 2.65, indicating that its current assets can repay short-term debts. Ideally, we'd like to see a liquidity ratio greater than 1, so NetEase's performance is superior to this standard.

NetEase showed a strong balance sheet that met all the requirements of a health company. If needed, NetEase can use additional working capital and continue to use its cash reserves to repay debts. I hope to see companies invest more and use these cash reserves in the future, especially considering NetEase's successful trend in terms of return on investment.

Currently, NetEase's dividend ratio is around 2.4%.

This analysis would be incomplete without considering the relationship between company value and stock price.

It is essential to consider these factors when analyzing a company's value and share price.

NetEase's price-earnings ratio is 15.78, which indicates that when compared to the long-term market average price-earnings ratio of 15, NetEase's pricing is relatively reasonable. NetEase's average price-earnings ratio for the past 10 and 5 years was 24.5 and 26.7, respectively. This indicates that the current NetEase transaction price may be below its historical average price-earnings ratio range.

The estimated value of the stock is $136.30, compared to the current share price of $98.90. This indicates that NetEase's current stock price is lower than its real value.

For a more detailed valuation, I'll use $6.34 in diluted earnings per share (EPS). I used the average of different growth rates and price-earnings ratios in the past to calculate different valuation ranges from low to average. These valuations compare earnings per share, book value, and the growth rate of total share capital.

In the table below, you can see the different scenarios. In the chart, you can see the vertical valuation line corresponding to the valuation range in the table. The dots on the line represent the current stock price. If the point is at the bottom of the valuation range, this indicates that the stock is undervalued. If the point is near the top of the valuation line, it indicates that the stock is overvalued.

According to this valuation analysis, NetEase was undervalued in all situations, with the exception of a valuation based on analysts' low expectations of growth.

The analysis shows that NetEase's average valuation is around $142 per share, while the current price is around $104, which indicates that NetEase is significantly undervalued.

After analyzing the fundamentals of NetEase, I think this company has solid business and healthy fundamentals. The company's revenue, gross margin, earnings per share (EPS), and return on invested capital (ROIC) are rising, and without the impact of COVID-19, these metrics would have reached their highest levels in history.

One shortcoming is that the company has not used its large reserves to invest further, which may further boost the company's growth. This is reflected in NetEase's declining return on equity. Privacy issues, regulation, and the saturation of the mobile gaming market are potential barriers that could affect NetEase's continued growth.

Overall, I'm not concerned about the company's long-term success. It has a significant competitive advantage in the mobile game field, and together with Tencent, it has become one of the giants in the industry.

In terms of valuation, my analysis shows that the stock is seriously undervalued.

Now let's take a look at how NetEase compared the US stock market benchmark S&P 500 over the past 10 years. As can be seen from the chart below, NetEase far exceeds the overall market in terms of long-term returns. As long as the company maintains a steady growth path, this trend should continue as more mobile games are released.

Even in the midst of the recent market downturn, NetEase has been a steady contributor to the portfolio over the past few years. As long as regulation remains in place, these strong returns will continue, at least in the short term.

Over the next five years, analysts who follow the company expect its earnings to grow at an average annual rate of 2.57%.

However, the stock's average yearly price target is $132.55, which means an increase of around 26.3% over the course of a year. The expected compound annual return is 13.59%.

If you invest today, according to analysts' forecasts, you could expect a return of around 5% per year (low growth including dividends). Here's another scenario based on NetEase's past earnings growth. Over the past 10 and 5 years, the average earnings per share growth rates were around 20% and 6.7%, respectively.

However, when considering the increase in cash flow over the past 10 and 5 years, the average growth rates were 19% and 17%, respectively.

So when considering all of these return possibilities, our average annual return is probably around 13%. If you consider NetEase's actual past performance, things will be different.

Here are actual 10-year and 5-year return results:

10-Year Return Results (Investing in NetEase): Initial Investment Date: May 18, 2014 End Date: May 18, 2024 Cost per Share: $14.13 End Date Price: $104.97 Total Dividend Earnings: $9.60 Total Return: 710.83% CAGR: 23%

5-Year Return Results (Investing in NetEase): Initial Investment Date: May 18, 2019 End Date: May 18, 2024 Cost per Share: $53.31 End Date Price: $104.97 Total Dividend Earnings: $7.28 Total Return: 110.56% CAGR: 16%

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From these scenarios, we came up with returns of 16% to 23%. I think if you're a long-term patient investor and believe in NetEase and its current products (video games, digital media, online education), you can expect NetEase to return around 13% per year over the long term. However, for short-term swing traders or impatient investors, NetEase may experience some fluctuations in the near future due to inflation, regulation, and possible restrictions on expanding its game to the US.

By comparison, the average return for the S&P 500 from 1928 to 2014 was around 10%. As a result, in a typical NetEase scenario, you can expect higher long-term returns than S&P 500 funds. Although individual NetEase stocks clearly do not provide the diversification of index funds, NetEase has proven that it has stable performance over a long period of time and can provide the diversity of some stocks outside the US.

P/E ratio below 16? Yes (15.78)

Is the valuation higher than the current stock price? Yes (Valuation $136.30 > Current stock price $104.97)

NetEase is a strong contender in any investor's portfolio in the short and long term. The continued rise in revenue and gross margin and the continued growth of expansion plans are positive signs that the company is healthy and has the potential to prosper.

I would like to see the company use more of its retained earnings to drive further stock growth, especially since the company has a good track record of generating return on investment. In addition to this, the company is in a strong position and can continue to bring rich returns to investors over the long term.

I'm interested in opening a position with this company. I think NetEase is solid in terms of fundamentals and is a strong incumbent in a growing industry.

I think the benefits of owning this well-funded, stable, and robust company outweigh the uncertain risks of restrictions and regulations.