Earnings preview: NetEase to gain from ecommerce push, gaming recovery in Q1

Chinese internet technology company NetEase (Nasdaq: NTES) had a promising start to 2019, after a challenging year, as it continued to focus on high-growth businesses like e-commerce and music streaming. The ongoing recovery of the gaming sector across the world also bodes well for the company.

NetEase is expected to unveil its first-quarter numbers after the regular trading hours on Wednesday. Wall Street’s average earnings forecast of $1.86 per share represents a sharp increase from last year. Revenues are seen climbing 33% to $2.71 billion. Going by the current trend, the chances of the company surpassing the forecast is about 50-50.

The global growth initiatives and expansion to new regions such as Japan, with focus on gaming, will have a positive effect on the first-quarter numbers. The management’s revised strategy, giving importance to high-growth areas like online education, e-commerce, and music, is working well.

The global growth initiatives and expansion to new regions such as Japan will have a positive effect in Q1

NetEase seems to be following a multipronged strategy to remain on the growth path – in the previous earnings announcement the company said it identified the focus areas. Curiously, the management embarked on a reorganization program under which several employees including those who served the core segments, were laid off.

In the December quarter, earnings rose sharply to $2.66 per share and topped the Street view by a wide margin, on the back of a 36% growth in revenues to $2.89 billion.  

NetEase and most of its peers in the Chinese technology industry, especially those engaged in the gaming business, are currently getting back on track after a relatively low phase. With the market conditions less encouraging and economy facing challenges, the key to remaining relevant is to focus more on global expansion. And, NetEase is doing the right thing.

The consensus recommendation of analysts’ covering NetEase stock is buy, with an average price target of $281.37. The shares suffered a great deal of volatility throughout last year. The trend reversed at the beginning of 2019 and the stock moved up to the levels seen before the downturn started last year. The stock has gained 11% so far this year.

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