Morgan Stanley issued a new research tactical idea, indicating a negative outlook for NetEase (NASDAQ:NTES) shares over the coming 60 days.
The firm's assessment points to a probable decline in the company's share price due to several factors including a lowered forecast and guidance, which may result in an earnings miss for the first quarter of 2024, expected to be reported on May 23.
Morgan Stanley has assigned a probability of 70% to 80%, or "very likely," for this scenario to unfold.
The investment firm anticipates weaker growth and margin outlook for NetEase throughout 2024. This is attributed to macroeconomic weakness impacting legacy game titles, increased competition leading to higher sales and marketing expenses, and the potential for regulatory changes.
These factors are expected to reduce the grossing potential and return on invested capital (ROIC) for both existing and future game titles.
Morgan Stanley forecasts a growth in game revenue and net profit of 6-7% for NetEase in 2024, which falls below the consensus.
The company's stock is currently trading at 13 times its projected 2024 earnings per share (P/E), which equates to approximately twice its projected earnings growth rate (PEG). This valuation is considered more expensive compared to its historical averages.
The visibility of NetEase's game pipeline is also a concern, particularly after the release of 'Naraka Mobile' in the summer, which is expected to face stiff competition from Tencent (HK:0700).
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.