On Tuesday, JPMorgan maintained its Overweight rating and $130.00 price target on NetEase.com (NASDAQ:NTES), even as the company's shares fell by 7%, underperforming the Hang Seng Index which rose by 2%.
The decline in NetEase's share price was attributed to the weaker than expected initial performance of its new game, "Condor Hero," which launched on March 28 and ranked No. 30 in the China iOS top grossing game ranking, falling short of investor expectations of a Top 5 ranking.
According to the analyst from JPMorgan, some gamers have expressed dissatisfaction with "Condor Hero," particularly criticizing the combat experience and graphic quality on the mobile platform. As a result, the firm has lowered its revenue projections for the game, adjusting the first month and first 12 months' cash grossing estimates from RMB 400 million - RMB 500 million and RMB 3 billion - RMB 4 billion to RMB 100 million - RMB 150 million and RMB 1 billion - RMB 2 billion, respectively.
JPMorgan now forecasts NetEase's second-quarter 2024 game revenue to be RMB 19.7 billion, which represents a 14% increase year-over-year but is flat compared to the previous quarter. This projection is 2% below the Bloomberg consensus. The firm's analysis also noted negative feedback on the PC version of "Fantasy Westward Journey" (FWJ PC), with gamers on online forums such as Baidu (NASDAQ:BIDU) Tieba criticizing the reduced virtual item gain from dungeons.
The operational team for FWJ PC, which was launched in 2003, responded to the feedback by issuing a communication letter explaining that the changes were made to curb the gains of professional gold farmers and to maintain in-game price stability. They also promised to optimize the gaming experience in future updates. JPMorgan estimates that FWJ PC contributes RMB 6-7 billion in annual revenue, accounting for 7-8% of NetEase's game revenue. Even with an aggressive assumption of a 20% revenue impact from the negative feedback, the overall impact on NetEase's game revenue would be minimal, at only 1-2%.
Despite the recent 16% correction from its peak, JPMorgan suggests that the current situation presents a buying opportunity for investors. The firm highlights that NetEase is trading at 13 times its projected 2024 earnings, which represents a discount of over 30% compared to its global gaming peers such as EA and Nintendo.
InvestingPro Insights
The recent performance of NetEase (NASDAQ:NTES) can be further understood by considering some key metrics and tips from InvestingPro. With a market capitalization of $61.74 billion and a P/E ratio sitting at 15.17 for the last twelve months as of Q4 2023, NetEase appears to be trading at a low price-to-earnings ratio relative to its near-term earnings growth, which could be an attractive point for value investors. Moreover, the company's PEG ratio for the same period is 0.33, indicating potential for growth when considering the earnings outlook.
Additionally, two InvestingPro Tips that may interest potential investors are that NetEase holds more cash than debt on its balance sheet and has maintained dividend payments for 12 consecutive years, with a notable dividend yield of 2.59% as of the latest data. These factors suggest a level of financial stability and commitment to shareholder returns, which could be reassuring amidst the current market dynamics.
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