NetEase (NTES): Earnings are Strong – Taking A Closer Look Under The Hood

Thursday, November 17, 2011 10:45 am



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NetEase (NTES) . is an Internet technology company that develops applications, services and other Internet technologies in China. The Company provides online gaming services that include in-house developed massively multi-player online role-playing games and licensed titles. NetEase also provides free email and various channels of content, online advertising, search and community services.

Competitors include:

  • Shanda Interactive – (SNDA)
  • Shanda Gaming – (GAMEZ)
  • Sohu (SOHU)
  • ChangeYou (CYOU)
  • Giant Interactive (GA)
  • Perfect World (PWRD)

Horowitz & Company’s proprietary Technical Scoring System (T|score) takes into consideration both individual security technicals as well as the overall market direction when considering whether or not to purchase a company. H&C’s Market Trend Indicator (MTI) is a measure which is designed to evaluate the overall trend in the market. There are four designated levels to assess the trend which include: Strong Downtrend, Downtrend, Rally and Strong Rally. We are currently in an environment where the MTI is in a Strong Rally. All of our indicators are showing that the markets are in a strong rally and risk is back on. Investors of all risk tolerances may consider moving to a higher level of equities while still looking to pick up companies with increased levels of technicals. With that said, this stock ranks in the highest percentile of stocks from an individual security technical score. H&C would consider purchasing a small portion of this position even during a Strong Downtrend. This position would be a definite purchase if the market were to be in Downtrend or any kind of Rally.

Below are some of the areas where Netease.Com Inc-Adr (NTES) excelled or detracted from the value of the technical score:

Stochastics are currently showing some bullish attributes which may mean this stock has some room to run in the short run.

Netease.Com Inc-Adr (NTES) over the past two weeks has recently crossed above its 50 day moving average. We see this as a bullish sign as the momentum is starting to change.

In terms of price and volume especially over a short period of time it is important to see if there is any weight behind either a rally or correction. This company has shown to have less than favorable price action in terms of volume and therefore has a greater chance to move lower if the overall market and economy are to trend lower. Higher volume with negative price also will provide resistance levels for this position if it were to increase back to these levels.

On a 12-month rolling period this company has not performed as well when comparing against its peers and equities in the S&P 1500. We see this as a negative sign for this company as it shows weakness relative to the overall market

H&C currently sees Netease.Com Inc-Adr (NTES) in a Short Term Uptrend and Long Term Uptrend.\

Horowitz & Company’s proprietary Fundamental Scoring System (F|score) takes into consideration many factors related to each company’s financial history and outlook. This system is oriented toward a growth model and therefore will give a higher score to those companies which continually show increasing earnings per share and revenue over time. Over the long-run (and when looking to purchase a security) we prefer companies with a track record of growth and solid fundamentals. In the short-term however, it is price / technicals that pay. When investing, we combine both of these analyses to seek out possible investment opportunities within our universe of stocks.

This stock ranks very highly with regard to fundamental factors and could be considered a candidate. See below for details on where this company thrives and possibly some of its drawbacks:

We find that EPS Growth on a Quarter over Quarter basis is one of the strongest components when screening for growth stocks. Continued EPS Growth in a company generally shows strength in leadership, the ability to manage expenses and improve the bottom line.Over the last three quarters, this company has done exceptionally well producing EPS Growth Rates last quarter, 2 quarters ago and 3 quarters ago 47.76%, 65.45%, 68.63% respectively.

Revenue Growth similar to EPS Growth is also a strong component to consider when screening and scoring for growth companies. Continued growth in revenue shows that the company is innovative, marketable and its products remain relevant in the marketplace.Over the last three quarters, this company has done exceptionally well producing Revenue Growth Rates last quarter, 2 quarters ago and 3 quarters ago 46.66%, 38.95%, 34.27% respectively.

The 5 Year EPS Growth Rate has added to the fundamental score with a value of 26.04.

Last quarter this company reported Earnings Per Share 11.85% better than analysts had expected. We believe this surprise although only for one quarter could set a trend for future earnings reports and guidance.

Price relative to earnings growth is commonly referred to as the PEG Ratio. This company may contain added value as it’s PEG Ratio is 0.94. We generally would like to see the PEG ratio under 1.5 and it is even better if it is under 1.0.

 

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