Novice Investing - Not Easy Being NetEase

Date: Monday 01st 2008f December 2008 05:35:35 PM

Not Easy Being NetEase - 11/08/2006

By: Novice Investing Staff

NetEase.com Inc. (NTES) which operates online gaming in China, reported a net profit of $ 39.8 Million or . However, it now expects fourth quarter profit to fall to $ 32.3 Million with revenue of $ 66 Million. Analysts expectation was for revenue of $ 73.3 Million with $ 39.9 Million net profit. While the third quarter earning represents 22% from a year ago, it is a mere 0.2% rise from last quarter. For the fourth quarter, NetEase now expects revenue to drop between 6 to 9 % from the third quarter of 2006. The article also talks about how NetEase had overtaken Shanda Interactive (SNDA) as the biggest online gaming operator in term of revenue.

In the third quarter, NetEase ends its cash pile at $ 478 Million in positive net cash or $ 3.70 per share. At this current price of $ 15.50 per share, NetEase is trading at 10.5 times 2006 earning. While that is a pretty low valuation, please note that NetEase business fluctuate wildly, depending on which game titles are popular at the time.

Regardless, we believe that the Shanda model of providing games for free while making money on avatar and advertisement will be the way to go in the long term. Just as Google revolutionize online advertising, Shanda too was taking big risk of letting gamers play the game for free. Revenue skids for several quarters after this new revenue model were implemented. However, profit has turned the corner and Shanda reported $ 0.24 per share of profit last quarter. Thus, the weakening expectation for the 4th quarter might be specific to NetEase. Generally, summer time ( the 3 rd quarter) is the weakest period for online gaming. As the weather gets colder, more people will do indoor activities, such as playing game.

For Net Ease investors, the only thing appealing right now is its low valuation and huge cash pile. Let's hope business held up well from now.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding NetEase.com Inc. (NTES) or any other securities.

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