Why NetEase Inc (ADR) (NTES) Is One Of Our Top Stock Picks

NetEase Inc (ADR) (NASDAQ:NTES) stock, which has delivered a return of over 18% in 2017 so far is one of our top stock picks. Here’s why.

Shares of Hangzhou, China-based NetEase Inc (ADR) (NASDAQ:NTES) have been part of our ‘stocks to buy‘ list since Jan 2011, when the stock first made it to the list. And since then, NTES stock has delivered a cumulative return of over 500%. The stock, which has made it to our list of top stock picks consistently, has started 2017 on a strong note too, piling on gains of over 18% in the Year To Date (YTD). Even after amassing these massive gains, NetEase remains one of our favorites. What makes NetEase so attractive?

Why We Like NTES Stock Right Now

Over the years, NetEase has backed its stellar stock performance with strong fundamentals, and even after the humongous returns it has delivered, most of those fundamentals are still very much intact. Let’s take a look at the pros and cons of investing in NetEase stock right now.

NetEase Is Still Growing At A Fast Clip

Back in 2011, when we first identified NetEase Inc (ADR) (NASDAQ:NTES) as one of the stocks with strong long term growth potential, the company’s quarterly revenue was just over $200 million. NetEase has come a long way since then, reporting a revenue of about $1.4 billion in Q3 2016, the company’s latest quarter. NetEase has seen its revenue grow at a Compounded Annual Growth Rate (CAGR) of 37.3% over the last 5 years. Yet, its top line growth continues to impress, having clocked in at over 31% in Q3 2016.

As we mentioned in our previous post, in which we explained why Facebook is one of our top picks, sequential growth is a handy indicator of consistent growth. While Year on Year (YoY) growth adjusts for seasonality, sequential growth eliminates exceptions like the base effect, which is a result of stronger of weaker than average comparable year ago numbers. Over the last two years, NetEase has delivered an average sequential growth of 12.9%, which is quite impressive.

Growth Doesn’t Come At The Cost Of Profitability For NetEase

In spite of the fact that NetEase is growing at a fast clip, the company hasn’t compromised on profitability. In Q3, for instance, NetEase recorded an operating profit margin of 31%, while maintaining a healthy net profit margin of ~30%. And that trend has sustained over longer periods of time. Over the last 5 years, NetEase has maintained an average operating profit margin of 36.4%. And the same kind of strength is reflected in other metrics like ROE and ROIC. NetEase has an REO of over 32% and an ROIC of over 220%. Both of those metrics inspire a lot of confidence.

While you’re holding onto NTES shares, there’s also a dividend yield of just over 1% on offer. That’s as of yesterday’s closing price. Further, the company also announced a buyback program (1) in November 2016. NetEase plans to buyback shares worth $1 billion over the course of 12 months starting from the date of announcement. That’s not much given the company’s ~$33 billion market cap. However, much like the dividend yield, it’s just one more additional attraction, albeit a small one.

The Risks Of Owning NTES Stock Right Now

In terms of valuations, if you exclude one time or non-recurring items and look at the PE for NetEase Inc (ADR) (NASDAQ:NTES), it’s actually lower than the industry average. In terms of its Price to Sales multiple, NetEase is more expensive than peers, at a P/S ratio of 6.4. However, given the company’s strong fundamentals, you’d probably expect that, and take it too.

NTES Stock Looks Set For Another Good Year In 2017

We think we’ve done a great job, picking NetEase as early as 2011, and we think the stock still looks good for long term investors. As Nathan Reiff of Investopedia puts it (2):

“U.S. investors often neglect companies outside of the U.S. market, particularly those that don’t have the same recognition in this part of the world. NetEase (NTES) is one of those companies.”

If you’re considering the idea of initiating a long position in NetEase in 2017, what The Motley Fool‘s (3) Bradley Seth McNew has to say may help you make up your mind:

“NetEase Inc (ADR) (NASDAQ:NTES) is one of the best plays on the thriving Chinese gaming market. This Chinese internet services company offers online gaming packs and also partners with companies such as Activision Blizzard to distribute many of their games throughout China. NetEase recently announced a slew of new PC and mobile games, 29 in total, and has promised to continue releasing new games in 2017. By valuation, NetEase is also the cheapest company on the list despite its great showing in 2016.”

To sum up, we think NTES is a good option for long term investors. Do check out our top stock picks from the tech sector, which we’ve linked to in the first paragraph. If you’re also looking for great auto stocks, check out our top auto stock picks, which have beaten the S&P 500 by over 148%.

And if you think fellow investors would find this post useful, do hit the share buttons on the left had side of this page. Happy investing – Team Amigobulls.

The article Why NetEase Inc (NTES) Is One Of Our Top Stock Picks originally appeared on amigobulls.com. Watch our analysis video on NTES

Amigobulls.com – Watch, Analyze, Invest. Why spend hours putting together numbers you can get in minutes, in one simple video? Our ‘Robo Advisor’ videos give you every number that matters, in 1 minute. Find insightful articles with ideas on investing, top stock picks that outperform the markets, personalized portfolio analysis videos and a whole lot more. Amigobulls.com – Your Friend On Wall Street.

Additional Links:

(1) http://www.netease.com/phoenix.zhtml?c=122303&p=irol-newsArticle&ID=2222406&ref=il

(2) http://www.investopedia.com/news/gaming-stocks-watch-2017-atvi-ntes/?ref=il

(3) http://www.fool.com/investing/2016/12/31/top-gaming-stocks-to-buy-in-2017.aspx?ref=il