BofA Securities has adjusted its outlook on NetEase.com (NASDAQ: NASDAQ:NTES), reducing the price target to $120 from the previous $142 while sustaining a Buy rating on the stock.
The revision follows an assessment of the company's performance and future prospects, particularly in the PC gaming sector, which has shown to be more resilient than anticipated.
The firm noted that NetEase's second-quarter PC game revenue remained flat year-over-year, surpassing the consensus forecast of a decline. The performance was attributed to less negative impact from adjustments to the game Fantasy Westward Journey PC (FWJ PC) and is expected to continue into the third quarter with the stabilization of FWJ PC and the introduction of new games, including Once Human and titles from Blizzard.
Despite a stable PC game trend, the company's mobile game outlook for the second half of 2024 remains uncertain. This uncertainty is due to a combination of factors, including weaker-than-expected deferred revenue growth, disappointing performance of Naraka Mobile post-launch, and the ongoing testing of a key game, Where Winds Meet, which is expected to launch within the year, potentially in both mobile and PC versions.
The report also mentioned concerns over recent game adjustments and the timing of key updates which may have contributed to the weaker revenue growth. Nevertheless, the company remains confident in its game-tracking curves and plans to roll out more active updates to bolster performance.
In light of these developments, BofA Securities has revised its price objective to $120 and reduced its projected earnings per share for 2024 by 5-9%. The new price target is also based on a lowered 2024 estimated price-to-earnings ratio of 17x, down from 19x, which aligns with the valuations of industry peers.
In other recent news, NetEase reported mixed Q2 results, with its earnings per share exceeding expectations at RMB12.15 ($1.67), surpassing the consensus forecast of RMB11.97. However, revenue of RMB25.49 billion ($3.51 billion) fell short of the projected RMB26.11 billion. Analysts from CLSA, Citi, and Jefferies have adjusted their outlooks on NetEase in light of these results, with CLSA reducing its price target to $120, Citi to $112, and Jefferies to $103. All firms maintain a positive rating on the stock despite these adjustments.
InvestingPro Insights
As BofA Securities revises its stance on NetEase.com (NASDAQ:NTES), it's worth noting that the company's financial health and market performance present a mixed picture with both challenges and opportunities. NetEase holds more cash than debt on its balance sheet, which is a positive sign of financial stability and risk management. Additionally, despite the stock experiencing a significant downturn over the past week, it is trading at a low P/E ratio of 14.89, suggesting that it may be undervalued relative to its near-term earnings growth potential.
InvestingPro data underscores this potential undervaluation, with a PEG Ratio for the last twelve months as of Q1 2024 at a mere 0.36, indicating that the stock's price may not fully reflect its earnings growth rate. The company's strong fundamentals are evidenced by a robust gross profit margin of 61.92% for the same period, highlighting its efficiency in generating income from sales. Furthermore, NetEase's commitment to returning value to shareholders is evident, as it has maintained dividend payments for 12 consecutive years, with a current dividend yield of 3.14%.
For investors seeking more in-depth analysis, there are additional InvestingPro Tips available, which provide further insights into NetEase's performance and prospects. Interested readers can find a comprehensive list of these tips and metrics on the InvestingPro platform. With NetEase trading near its 52-week low and analysts predicting profitability this year, these insights could prove valuable for making informed investment decisions.
For a more detailed analysis and additional InvestingPro Tips related to NetEase, please visit InvestingPro.
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