We recently compiled a list of 7 Most Profitable Gaming Stocks To Invest In. In this article, we will look at where NetEase Inc. (NASDAQ:NTES) ranks among the most profitable gaming stocks to invest in.

Gaming Evolution: Key Trends Shaping the Market

The gaming industry is currently experiencing significant changes driven by technology and evolving consumer preferences. One of the most notable trends is the integration of artificial intelligence (AI), which is transforming game development and player experiences. AI is being used to create more realistic environments and enhance gameplay by adapting to individual player styles. Here’s a short excerpt from our previous article “7 Best Gaming Stocks To Buy Now” that discusses this in more detail:

“According to Bernard Marr, a world-renowned futurist and author of ‘Generative AI in Practice: 100+ Amazing Ways Generative Artificial Intelligence is Changing Business and Society’, generative AI is revolutionizing video game development by providing tools that enable developers to create engaging content, realistic visuals, and immersive gameplay experiences. Marr believes that generative AI can help developers create vast, unique game environments through procedural generation, allowing for dynamic gameplay experiences that change with each session.”

Another major trend in the gaming market is the rise of microtransactions, particularly in free-to-play games. This monetization model has become increasingly prevalent as developers look for sustainable revenue streams.

On March 24, CNBC reported that two of the largest video game companies in the US, Electronic Arts and Take-Two Interactive, are increasingly relying on live-service games, subscriptions, and in-game purchases for their revenue. Microtransactions, which allow players to buy virtual items or features within games using real money, have become a significant source of income. Popular titles like Fortnite, Call of Duty: Warzone, and Clash Royale utilize this model, where players pay for ongoing updates and seasonal content through subscriptions or battle passes.

Mat Piscatella, executive director of video games at Circana, noted that the industry has shifted towards a “battle pass” system, which packages seasonal content in a way that players find valuable. This approach has led to a more positive response from gamers, as they feel they receive consistent value for their money. The trend indicates that game publishers must continuously engage players with new content to maintain their interest in these live service games.

According to Comscore’s 2024 State of Gaming Report, around 82% of American gamers made in-game purchases in freemium games in 2023. The report also highlighted that 62% of adults over 18 participate in gaming activities, showcasing the widespread appeal of video games across various age groups.

Esports is becoming increasingly popular, especially among younger audiences. The report found that 86% of Gen Z and 80% of millennials watched esports last year. Additionally, 53% of Gen Z and 61% of millennials interacted with esports content, highlighting the increasing popularity of competitive gaming among these age groups.

Methodology

To compile our list of the 7 most profitable gaming stocks to invest in, we used the Finviz and Yahoo stock screeners to find the largest gaming companies. We also reviewed our own rankings, sifted through ETFs, and consulted various online resources.

Next, we focused on profitability. From this initial list of more than 20 gaming companies, we narrowed our choices to stocks that had positive trailing twelve-month (TTM) net income and stocks that have grown their net income positively over the past 5 years.

To ensure the reliability of our findings, we consulted reputable sources such as SeekingAlpha, which provided insights into the net income CAGR over the past five years, and YCharts, which offered information on TTM net income.

Finally, from this list of the most profitable stocks that met our criteria, we focused on the top 7 stocks most favored by institutional investors. Data for the hedge fund sentiment surrounding each stock was taken from Insider Monkey’s database of 912 elite hedge funds. The 7 most profitable gaming stocks to invest in are ranked below in ascending order based on the number of hedge funds holding stakes in them as of Q2 2024.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

NetEase Inc. (NASDAQ:NTES)

TTM Net Income: $4 Billion

5-Year Net Income CAGR: 26.92%

Number of Hedge Fund Holders: 35

NetEase Inc. (NASDAQ:NTES) is a Chinese technology company that specializes in gaming, education, and e-commerce. Its diverse portfolio includes popular mobile and PC games that appeal to both local and international audiences. Over the years, the company has successfully expanded its offerings by developing its own games and collaborating with global partners.

NetEase Inc. (NASDAQ:NTES) is launching new titles as it focuses on growing its gaming business. Its recently launched multiplayer survival game, Once Human, quickly attracted over 230,000 concurrent players shortly after launch, ranking among the top five games on Steam in July. Following an update in August, it reached the top of Steam’s best-seller chart in 12 countries and accumulated over 10 million downloads. In July, the company launched Naraka: Bladepoint Mobile, a battle royale game that features fast-paced combat and a unique AI co-pilot system. This title achieved the third spot on the iOS grossing chart shortly after its release.

Financially, the company is performing well. In the second quarter of 2024, NetEase Inc. (NASDAQ:NTES) reported net revenue of $3.5 billion, a 6% increase year-over-year. Revenue from games and related services rose by 7%, driven largely by mobile titles like Identity V and Justice Mobile. Mobile games contributed about 76.4% of total online game revenue, highlighting their importance to the company’s growth.

NTES is one of the most profitable gaming stocks to invest in. Over the past five years, the company has achieved a compound annual growth rate (CAGR) of 16.57% in revenue and 26.92% in net income.

NetEase Inc.’s (NASDAQ:NTES) commitment to innovation and community engagement positions it favorably in the competitive gaming market. According to Insider Monkey’s Q2 database of over 900 hedge funds, 35 hedge funds held stakes in NetEase Inc. (NASDAQ:NTES). As of June 30, Orbis Investment Management holds 1.9 million shares of the company, valued at $182.28 million, making it NetEase Inc.’s (NASDAQ:NTES) most prominent shareholder.

Overall NTES ranks 4th on our list of the most profitable gaming stocks to invest in. While we acknowledge the potential of gaming companies, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than NTES but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

Disclosure: None. This article is originally published on Insider Monkey.