On Friday, CFRA maintained a Buy rating on NetEase.com (NASDAQ:NTES), with a price target of $130.00, citing expectations of stronger future quarters driven by the launch of major game titles. The firm's 12-month target price remains unchanged, based on 18.8 times the projected 2024 earnings per American Depositary Share (ADS), which aligns with the five-year average of 20.5 times.
Despite anticipating a slower compound annual growth rate (CAGR) of 12% through 2025, compared to the five-year average of 35%, the firm believes the valuation is justified, considering an expected turn in interest rates by the end of 2024.
CFRA predicts that NetEase's Games segment will fuel revenue growth, particularly with the release of new titles such as "Naraka: Bladepoint" mobile in the second quarter, "PC Where Winds Meet" in the third quarter, and other launches including regional releases of "Justice" and "Once Human." Additionally, the firm foresees an increase in profits driven by the Cloud Music segment as it expands and achieves greater scale.
In the first quarter of 2024, NetEase reported a 7% increase in revenue, with its Games division also up by 7%. Other segments, such as Youdao (NYSE:DAO) and Innovative Businesses, grew by 20% and 6%, respectively.
Cloud Music saw a 4% rise, bolstered by accelerating subscription numbers which hit a two-year high. The company's gross margin improved by 3.9 percentage points to 63.4%, benefiting from higher margins across segments, except for Youdao, which faced higher investment costs.
Net profit for NetEase in the first quarter rose by 13%, despite a 33% increase in Selling, General, and Administrative (SG&A) expenses and an 11% rise in Research and Development (R&D) costs. This profit increase was attributed to a reversal in foreign exchange losses, which helped balance the higher operational expenses.
InvestingPro Insights
According to the latest data from InvestingPro, NetEase (NASDAQ:NTES) maintains a robust financial position with a market capitalization of $61.06 billion and an attractive P/E ratio of 15.03, signaling a potential undervaluation relative to near-term earnings growth. The company's revenue growth over the last twelve months stands at 7.23%, demonstrating steady progress in its financial performance. Moreover, NetEase's gross profit margin of nearly 61% underscores its efficiency in generating earnings relative to revenue.
InvestingPro Tips suggest that NetEase holds more cash than debt on its balance sheet, providing financial stability and flexibility. Additionally, the company has a proven track record of maintaining dividend payments for 12 consecutive years, offering investors a reliable income stream with a current dividend yield of 2.7%. These insights, coupled with the fact that analysts predict NetEase will be profitable this year, can be particularly valuable for investors evaluating the company's long-term prospects.
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