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NetEase, Inc (ADR) (NTES), Activision Blizzard, Inc. (ATVI): World of Warcraft’s Decline Cannot Hold This Company Back

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NetEase, Inc (ADR) (NASDAQ:NTES)‘s performance so far this year has been nothing short of impressive. 2012 wasn’t a great year to be a NetEase, Inc (ADR) (NASDAQ:NTES) investor as the stock’s performance tapered off toward the end of the year on the back of weak earnings reports.

NetEase, Inc (ADR) (NASDAQ:NTES) has gained close to 75% year-to-date. Moreover, its recently released earnings report and upcoming strategic moves indicate that more upside is in store for NetEase investors. So, even though analysts at Nomura Securities have downgraded the stock, a look at the company’s prospects and strategies will tell us that there are solid reasons to stick with NetEase.

In the second quarter, NetEase, Inc (ADR) (NASDAQ:NTES)’s revenue jumped almost 20% to $369 million (excluding sales tax), beating the consensus estimate of $363.5 million. Diluted earnings came in at $1.37, well ahead of the consensus estimate of $1.24 and significantly up from last year on the back of NetEase’s share repurchase program and higher revenue.

Activision Blizzard, Inc. (NASDAQ:ATVI)

Avoiding the drop
Most importantly, NetEase’s focus on developing its own games helped it mitigate the decline in subscribers of Activision Blizzard, Inc. (NASDAQ:ATVI)‘s World of Warcraft. NetEase, Inc (ADR) (NASDAQ:NTES) has the exclusive license to operate the game in China, but of late, the subscriber count of the popular game has dropped significantly.

In the previous quarter, Activision Blizzard, Inc. (NASDAQ:ATVI) reported that WoW had 7.7 million subscribers, a drop of 600,000 on a sequential basis and the lowest ever count in the last six years. What’s more worrying is that the majority of this drop is coming from China, where NetEase operates the game. Activision Blizzard, Inc. (NASDAQ:ATVI)’s cult game has been on the market for long, and as such, the precipitous drop in the subscriber count can be expected as players look for a new experience.

But, Activision Blizzard, Inc. (NASDAQ:ATVI) is still trying to infuse some life into the game, like it has done so far through expansion packs. It has been trying to move to a free-to-play model and promote in-game purchases. Such moves on Activision’s part may or may not benefit its licensing partner NetEase, depending on the outcome of such strategies, but NetEase has already been switching gears so that it doesn’t have to depend much on Activision Blizzard, Inc. (NASDAQ:ATVI).

Playing with a good strategy
NetEase’s self-developed games seem to be doing really well. The company has already brought out a few games this year, such as Heroes of Three Kingdoms and Dragon Sword. Going forward, NetEase, Inc (ADR) (NASDAQ:NTES) plans to go on a marketing blitz to attract more gamers to its stable and as such, it might incur higher expenses. But, the company can benefit from the long-term success of these games through expansion packs and newer content.

Like many others in the industry, NetEase is also looking to keep gamers interested by releasing fresh content. As such, it introduced expansion packs for Ghost II and Fantasy Westward Journey II recently. This strategy of introducing expansion packs is a tried and tested one and can help game publishers enjoy revenue for long periods of time. For instance, Activision Blizzard, Inc. (NASDAQ:ATVI) has kept World of Warcraft running with four expansion packs in eight years.

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