NetEase Inc (NTES, Financial) has recently experienced a significant daily loss of -16.07%, with a three-month decline of -13.57%. Despite this downturn, the company's Earnings Per Share (EPS) stands at 5.79. Investors and analysts are keen to understand whether these figures suggest that NetEase is modestly undervalued. This article delves into a valuation analysis of NetEase, providing insights that could guide potential investment decisions.
Understanding NetEase's Business and Valuation
NetEase Inc (NTES, Financial), founded in 1997, has grown into a formidable online services provider in China. Its diverse portfolio includes online and mobile games, cloud music, media, advertising, email, live streaming, online education, and e-commerce. The company has developed some of China's most popular games and collaborates with renowned developers like Blizzard Entertainment and Mojang. With a current stock price of $87.64 and a market cap of $56.50 billion, the focus is on how this compares to the GF Value, which suggests a fair value estimate of $105.35.
Breaking Down the GF Value
The GF Value is a proprietary metric that estimates the intrinsic value of a stock. It incorporates historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance projections. This GF Value Line suggests the ideal fair trading value for a stock. If NetEase's stock price is below the GF Value Line, it indicates potential for a higher future return, signaling that the stock may be modestly undervalued. NetEase's current price of $87.64, in light of its market cap and intrinsic value, supports this assessment.
Financial Strength of NetEase
Investing in companies with robust financial strength is crucial to avoid potential capital loss. NetEase's financial health is reflected in its cash-to-debt ratio of 9.51, ranking it above 58.95% of peers in the Interactive Media industry. This strong financial position is further affirmed by GuruFocus, which assigns NetEase a financial strength rating of 8 out of 10.
Profitability and Growth Prospects
NetEase's consistent profitability over the past decade underscores its appeal as a stable investment. The company boasts a revenue of $14.40 billion and an Earnings Per Share (EPS) of $5.79, with an impressive operating margin of 24.83%. This level of profitability is not only sustainable but ranks well above the majority of its industry counterparts. Growth is also a critical factor, with NetEase's 3-year average annual revenue growth standing at 17.3%, indicating a strong potential for future value creation.
Comparing ROIC and WACC
An insightful way to gauge NetEase's profitability is by comparing its Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC). With an ROIC of 27.99 and a WACC of 7.31, NetEase is effectively creating value for its shareholders, as indicated by the higher ROIC relative to the cost of capital. This positive spread suggests efficient management of resources and a promising outlook for investor returns.
Conclusion: Is NetEase a Wise Investment?
In conclusion, NetEase (NTES, Financial) appears to be modestly undervalued, presenting a potentially lucrative opportunity for investors. The company's solid financial foundation, exceptional profitability, and above-average growth prospects make it an attractive option in the Interactive Media industry. For a deeper dive into NetEase's financials, one can explore its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
