NetEase witnessed staggering top line growth during year ended 2016, with revenue touching $5.5 billion as compared to $3.28 billion during 2015. This translates to a growth rate of an astonishing 67%. The growth was a result of increased adoption of online mobile games in China, launch of more than 40 game titles in 2016 and the licensing deal with Activision Blizzard. Strong sales of Overwatch along with the release of the new expansion pack for World of Warcraft also boosted the company’s revenue.

Primary revenue source for the company is certain online games including PC client MMORGPs, mobile games and games licensed from Activision Blizzard. These games contributed around 77.5%, 72.3 % and 69.2% towards total net revenues in 2013, 2014 and 2015, respectively. Mobile games revenue in China is expected to grow at a CAGR of 10% during the next five years. Newzoo expects the Chinese market to grow at a CAGR of 8% during 2016-2020.

However, IDC is a little more optimistic about the growth of Chinese market. In 2016-2020, “the operating revenue of the China gaming market is expected to grow at a compound annual growth rate (CAGR) of 12.2%,” said Neo Zheng, research manager, Terminal System Research, IDC China.

Average revenue per user is expected to grow at CAGR of 6% during 2016-2021; 10% growth is expected during 2017. Overall, online games industry will continue to follow a growth trajectory going forward. The growth projections aren’t as rosy as they were in the past yet the market is set for a double-digit growth. NetEase, being a dominant player in China, will benefit from this growth going forward. Moreover, there are certain reasons to remain bullish on NetEase:

NetEase is dominating the mobile gaming front

The company is one of the leading online games providers in China. According to App Annie analytics, NetEase, as of April 2017, has three games in the top ten of the top grossing charts. It is worth mentioning that Tencent, the leader in online games in China, has two apps in the top grossing segment.

The company is a premium revenue generator

Moreover, the company is generating more per app revenue as compared to Tencent indicating NetEase’s games are more lucrative.  The company enjoys an extended gaming lifecycle.

The table clearly depicts NetEase is more efficient in terms of generating revenue from its games. What’s more interesting is that the company is at a fourth position in terms of game downloads during March 2017, yet it holds the second position in term of revenue generated. This indicates that NetEase’s games have an extended revenue life cycle. While others are trying to capture revenue from new games, NetEase’s older games are assisting in maintaining the company’s top line. Note that NetEase consistently had three to four games in top revenue generating charts during the last six months.

NetEase is a mobile gaming leader alongside Tencent in China. Therefore, the company is exposed to the ddouble-digitgrowth in China’s mobile gaming market. Expansion in new markets is expected to further boost the company’s revenue. Moreover, NetEase generates a higher amount per game as compared to its counterparts. Longer life cycle is also one of the key advantages for the company. Overall, given the prospects in China, NetEase’s ability to generate premium revenue and reasonable valuation, the stock is a buy.

Source: Yahoo

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