On Wednesday, HSBC adjusted its outlook on NetEase.com (NASDAQ:NTES), a leading Chinese internet technology company, by reducing the stock's price target from $130 to $126, while maintaining a Buy rating. The revision follows a reassessment of the company's growth prospects for the year, influenced by several factors affecting its gaming segment.
The firm noted that its initial growth expectations were overly optimistic, citing underperformance from the newly launched game "Condor Hero," a revenue decline in the PC version of "Fantasy Westward Journey" (FWJ), and a delayed launch for the mobile version of "Where Winds Meet" (WWM).
A particularly concerning trend was the 6% year-over-year decline in user activities for FWJ in the first quarter of 2024, as NetEase may focus on enhancing user experience rather than immediately driving monetization.
Despite these setbacks, HSBC anticipates that the reintroduction of Blizzard's titles in the second half of the year and the forthcoming contribution from the PC version of WWM, starting July 26, could help mitigate some of the negative impacts.
Consequently, the firm has revised its 2024 estimates for game revenue growth down to 10% from the previous 13%, while maintaining a 10% compound annual growth rate (CAGR) for 2024-2026. Projections for 2024 indicate a 3% year-over-year decrease in PC game revenue and a 14% increase in mobile game revenue, taking into account the lower contributions from "Condor Hero" and "WWM" mobile.
Furthermore, HSBC has adjusted its earnings growth forecast for NetEase for 2024-2026, trimming it by 1-3%. This adjustment has been reflected in the new target price of $126. The firm also highlighted that NetEase's share price has retracted by 15% from its peak on February 27, currently trading at 13x/9x 2024 estimated PE and ex-cash PE, which is below the historical average and its peers.
HSBC's analysis suggests that the current share price already factors in the potential disappointments and risks, and the prospect of a 6% shareholder return could provide a supportive base for the stock.
InvestingPro Insights
For investors considering NetEase.com (NASDAQ:NTES) in light of recent market assessments, InvestingPro provides a deeper financial perspective. With a market capitalization of $58.21 billion and a robust P/E ratio that stands at 14.34 for the last twelve months as of Q4 2023, NetEase appears to be trading at a value that reflects its near-term earnings growth potential. This is further underscored by a PEG ratio of 0.31, suggesting that the stock could be undervalued based on its earnings growth estimates.
InvestingPro Tips highlight that NetEase holds more cash than debt on its balance sheet and has been a prominent player in the Entertainment industry, maintaining dividend payments for 12 consecutive years. Additionally, analysts predict the company will remain profitable this year, which aligns with the high return on assets of 16.37% reported in the last twelve months.
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