NetEase.com Showing Its Age

NetEase.com, Inc. (NTES) is one of the leading providers of online gaming, advertising, web-based communication services, and a variety of interactive content in China.

NetEase is currently trading at 16.8x estimated 2008 EPADR of $1.56, a discount to the industry. Rolling our valuation to fiscal 2009 EPADR estimate of $1.74, the company is trading at 15.1x, which is far below the industry average. NetEase faces intense competition in the gaming and advertising market. Delayed product launches and growing operating expenses have hurt profitability.

NetEase appears to have turned the corner, posting better-than-expected revenue and earnings results in the first half of 2008. The company’s solid execution in its online games and advertising business has helped NTES grow its top and bottom line. We believe that China's online gaming and advertising industry is in the midst of unparalleled growth and NetEase is well positioned to benefit from this trend.

Although the company is executing well currently, we are concerned that the bulk of its revenues come from relatively old game titles. We therefore maintain a Hold rating on NTES shares. We set our six-month price target to $27.50. This price is based on a P/E multiple of 15.8x our 2009 EPADR estimate of $1.74, which is much lower than the industry mean and median. NTES is trading at a discount to its peers, reflecting the company’s growth prospects into 2008 as well as 2009.

Priyanka Poddar contributed to the report.

Read the full analyst report on NTES

Read the full analyst report on NTES