NetEase, Inc (ADR) (NTES), Activision Blizzard, Inc. (ATVI): How To Be Smart

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NetEase, Inc (ADR) (NASDAQ:NTES)2012 was a forgetful year for NetEase, Inc (ADR) (NASDAQ:NTES), as the Chinese online gaming giant was beaten down badly in the second half of the year after a string of awful quarterly reports. But, I knew that the company’s business was strong enough and it would be just a matter of time before it bounces back. As expected, this year has been great so far for NetEase, Inc (ADR) (NASDAQ:NTES) investors as the stock has gained more than 40%.

A closer look at the company’s just released quarterly report further tells us that NetEase, Inc (ADR) (NASDAQ:NTES) has been going about its business in a very strategic and methodical manner. It has been reducing its dependence on licensed games and is instead focusing on its in-house games.

Smart moves

Thus, despite a steep decline in the number of subscribers in Activision Blizzard, Inc. (NASDAQ:ATVI)’s World of Warcraft, which NetEase operates in China and derives licensing revenue from, the company managed to post year-over-year top-line growth of 13%. NetEase’s revenue came in at $363.6 million, comfortably ahead of the analyst estimate (Yahoo! Finance) of $348 million. Earnings came in at $1.32 a share, well ahead of the $1.20 consensus estimate and 13% higher from last year.

The company’s self-developed games, such as Fantasy Westward Journey, Westward Journey Online II, Heroes of Tang Dynasty II, and Kung Fu Master performed well and helped offset the outflow of 1.3 million subscribers (with most of them being from China) from Activision Blizzard, Inc. (NASDAQ:ATVI)’s World of Warcraft. NetEase, Inc (ADR) (NASDAQ:NTES) is focused on making its self-developed games stronger and as such, it has been putting its marketing machinery behind them.

Playing it nice and easy

Moreover, the company’s strategy of extending the life cycle of its games through expansion packs, along with new games, should lend further momentum to its top line going forward. Apart from releasing a number of expansion packs, NetEase’s pipeline includes games such as Dragon Sword, a 3D MMORPG, Legend of Tibet, a 2.5D MMORPG, and a first person shooter game.

NetEase, Inc (ADR) (NASDAQ:NTES)’s game development, coupled with the booming online gaming market in China, is certainly a positive and should lead to better top-line performance going forward. Its new games and expansion packs would bring fresh content to the players in the country and help mitigate the falling popularity of an eight-year-old franchise such as WoW.

Activision Blizzard, Inc. (NASDAQ:ATVI) expects further declines in the subscriber count of World of Warcraft in the future due to stiff competition from free-to-play games and saturation levels of gamers being attained. Even though the publisher has decided to make substantial investments in order to arrest the decline in subscriber count, I doubt if it would be very successful for reasons I’d pointed out earlier. Keeping this in mind, NetEase has been doing the right thing by promoting its own games and focusing on their development.

NetEase’s diversification doesn’t stop here. The company’s advertising services revenue grew 15% in the previous quarter while email services revenue jumped a whopping 65%. Although these businesses contribute a small portion to NetEase’s overall revenue, the company expects that the rapid growth of internet in China could lead these services to perform even better going forward.

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