NetEase Inc (NTES, Financial) experienced a daily loss of -1.5% with a 3-month gain of 4.73%. The company's Earnings Per Share (EPS) stands at 5.59. The question we aim to answer is - is NetEase (NTES) fairly valued? This article presents a detailed valuation analysis of the company. Read on to gain valuable insights.
About NetEase Inc (NTES, Financial)
NetEase, established as an internet portal service in 1997, is a leading online services provider in China. Its key services include online/mobile games, cloud music, media, advertising, email, live streaming, online education, and e-commerce. The company develops and operates some of China's most popular PC client and mobile games, and it partners with global leading game developers, such as Blizzard Entertainment and Mojang (a Microsoft subsidiary).
Comparing the stock price and the GF Value, an estimation of fair value, provides a snapshot of the company's value. This approach efficiently paves the way for a more profound exploration of the company's value, ingeniously integrating financial assessment with essential company details.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
NetEase (NTES, Financial) appears to be fairly valued based on GuruFocus' valuation method. The GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $ 99.8 per share, NetEase stock gives every indication of being fairly valued.
Because NetEase is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
NetEase's Financial Strength
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. NetEase has a cash-to-debt ratio of 6.93, which is better than 50.26% of 569 companies in the Interactive Media industry. GuruFocus ranks the overall financial strength of NetEase at 8 out of 10, which indicates that the financial strength of NetEase is strong.
Profitability and Growth of NetEase
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. NetEase has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $14.10 billion and Earnings Per Share (EPS) of $5.59. Its operating margin is 22.73%, which ranks better than 82.74% of 585 companies in the Interactive Media industry. Overall, GuruFocus ranks the profitability of NetEase at 10 out of 10, which indicates strong profitability.
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. NetEase's 3-year average revenue growth rate is better than 67.38% of 515 companies in the Interactive Media industry. NetEase's 3-year average EBITDA growth rate is 10.8%, which ranks better than 53.09% of 388 companies in the Interactive Media industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, NetEase's return on invested capital is 23.65, and its cost of capital is 7.8.
Conclusion
In summary, the stock of NetEase (NTES, Financial) gives every indication of being fairly valued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 53.09% of 388 companies in the Interactive Media industry. To learn more about NetEase stock, you can check out its 30-Year Financials here.
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