Why This Growth Stock Went Up +10% on Monday

This first appeared in the Seeking Alpha Marketplace service DGI Across North America, from which you can get real-time buy and sell alerts (and explanations) when I make moves in my portfolio.

Summary

  • NetEase up 10.4% on Monday. My position is up nearly 17% in a little over 2 months.
  • News came out that it plans to buy ~$11 billion of inventory over the next 3 years from the U.S., Europe, and Japan to sell to the Chinese market.
  • NetEase is primarily a video game publisher in China that has been diversifying into e-commerce.
  • NetEase is reasonably valued after the pop based on the consensus low-end earnings growth estimation.
  • Interested investors can nibble here to start a position, but will be safer to buy on a meaningful dip — perhaps one will occur when the company reports Q3 results on Nov 15.

Occasionally, dividendfocused portfolios need some growth to spice things up. And NetEase Inc. (ADR) (NASDAQ:NTES) is a good candidate for consideration.

NetEase stock appreciated 10.4% on Monday. In the DGI Across North America service, I gave a real-time alert and the reasoning for buying NetEase, which is now up nearly 17% in a little over 2 months.

NetEase position November 2017

Source: Author

The following quotes are excerpts from my previous article that’s available in the service.

NetEase was founded in 1997 and has been listed on the NASDAQ since June 30, 2000. Even for an investment that was made at the end of 2007 would have delivered an annualized return of 32%!

This outperformed Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) which has delivered an annualized return of 10.8% in the period, Baidu (ADR)(NASDAQ:BIDU): 19.6%, and even Amazon (NASDAQ:AMZN): 27.2%.

NetEase is the second-largest video game publisher in China.

In 2016, NetEase generated 73.3% of its revenue from its online games.

NetEase PC games Q2 2017

Source: Company Q2 2017 presentation – Slide 6

NetEase mobile games Q2 2017

Source: Company Q2 2017 presentation – Slide 7

The News That Caused the +10% Pop

The quotes that follow are from this Bloomberg article: NetEase to Spend About $11 Billion on Goods for E-Commerce Unit

NetEase has been diversifying into the e-commerce space. To push its e-commerce business further, NetEase plans to “buy about $11 billion of inventory over the next three years from the U.S., Europe and Japan.”

The ~$11 billion amount hasn’t factored in purchases from Australia and Korea yet.

Netease is bolstering growth by tapping into local demand for established international brands. Overseas health supplements and cosmetics have gained favor in recent years among a populace unnerved by a rash of safety scares. While Alibaba (BABA) dominates e-commerce in the country by acting as a digital landlord to sellers, Kaola [NetEase’s e-commerce platform] buys almost all its inventory directly from companies overseas, bypassing local distributors and middlemen to lower costs.

There are many fake products in China. Simply, google “fake egg china” or “fake cosmetics china” to get an idea of what I mean. So, that’s why people there prefer imported products if they can get their hands on it.

“This industry could be worth 500 billion yuan ($75 billion) by about 2021,” Kaola Chief Executive Officer Zhang Lei said in an interview. “This is a new race course – Kaola wants to be a major leader here and capture much of the market share from the existing leaders.”

Fundamentally

At under $310 per share, NetEase trades at a 2017 price-to-earnings multiple of ~19.5 while 33 analysts estimate the company will grow its earnings per share by 12.5-20% per year for the next 3-5 years. So, the company is still reasonably valued for the low-end growth rate.

Should You Buy NetEase After The Pop?

If you have a long-term investment horizon of at least three years, you might buy some here. But we don’t know how successful Kaola will be in expanding its market share in the e-commerce space.

Since we just had a pop based on perceived good news (and not based on company performance), it’s safer to wait for a dip first. Perhaps a dip will occur when the company releases its Q3 earnings report on November 15. Around earnings report time, this kind of stock can be quite volatile.

NetEase Google Finance 5-year chart to November 2017

Source: Google Finance – 5-year chart

For this stock, investors are taking on above-average volatility. Just take a look at the ups and downs of the chart above. Additionally, there’s also foreign exchange volatility risk as the company earns and reports in the Chinese Yuan.

If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.

Disclosure: At the time of writing, I’m long on AMZN, GOOG, and NTES.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

Get Exclusive Articles from me on Seeking Alpha

  • Access my portfolio of high-quality U.S. and Canadian dividend stocks.
  • Real-time updates of when I buy or sell from this portfolio.
  • Get best ideas of the top 3 dividend stocks from my watchlist. Updated each month.
Learn More

Leave a Comment

Your email address will not be published. Required fields are marked *