Why NetEase Stock Has Risen 10.0% on Thursday

NetEase (NTES) shares have risen almost 10.0% in early market trading on Thursday. The company announced its second-quarter results on Wednesday.

NetEase’s stellar quarterly results

The company reported revenues of $2.73 billion—a rise of 15.0% YoY (year-over-year). The EPS rose 35.0% to $4.09. In the second quarter of 2018, NetEase reported sales of $2.37 billion and an EPS of $3.02.

While the revenues missed analysts’ estimates of $2.74 billion, the company’s bottom line beat the expectations. The bottom line drove the stock significantly higher on Thursday.

What drove the revenues?

NetEase’s online games continued to be the primary revenue driver. The business segment exceeded the 10 billion renminbi mark or $1.4 billion for the fifth consecutive quarter. Online gaming sales rose 14.0% YoY in the second quarter. The company’s growth drivers are popular gaming titles like Fantasy Westward Journey and Night Falls: Survival and Invincible.

The upcoming quarters will likely drive the company’s sales higher. Analysts expect NetEase’s sales to grow 15.9% to $11.6 billion in 2019, 16.7% to $13.5 billion in 2020, and 11.4% to $15.03 billion in 2021.

NetEase has multiple revenue drivers. The global game industry continues to grow at a solid pace. The transition towards digital and online gaming improved the profit margins and contributed to sales growth.

Recently, NetEase announced that it will invest $700 million to build a Sports Park in Shanghai’s Qingpu district. The park would be used for multiple eSports events. NetEase might build a venue to host eSports events. The venue would have a seating capacity of 5,000. NetEase already owns one of the franchises in Activision Blizzard’s (ATVI) Overwatch League.

Activision announced that the Overwatch team owners will host two events in 2020. The events will give NetEase an opportunity to increase user engagement through the eSports themed sports park.

Is the stock undervalued at the current price?

NetEase will likely grow its bottom line at a strong pace. Analysts expect the company’s earnings to grow 65.4% in 2019 and 15.0% in 2020. Compared to the stock’s forward PE ratio of 18.1x, the company is grossly undervalued. Also, NetEase also has a dividend yield of 1.2%.

NetEase stock has been volatile in the last year due to the US-China trade war and a slowing domestic economy. The stock has returned just over 3.0% in the trailing 12 months. So far, the stock has risen 0.4% year-to-date. The stock has underperformed in the last three years with a return of just 21.0%. However, the stock has risen 200.0% in the last five years.

NetEase shares are on the verge of a breakout after trading sideways for quite some time. Analysts are optimistic about NetEase. They have an average 12-month target price of $309.64 on the stock, which indicates an upside potential of 31.0% from the current price.