NetEase Earnings: Investors Overreact to Temporary Gaming Slowdown

Narrow-moat NetEase’s second-quarter results were mixed with slightly lower revenue yet higher operating income compared with our estimates. Concerns about the near-term outlook were sparked by slowing game revenue and mid-single-digit deferred income growth, as evidenced by a more than 10% decline in share price during US trading. However, we view this reaction as shortsighted, overly fixated on minor fluctuations in near-term revenue. In our view, NetEase's commitment and patience in developing next-generation games will yield substantial rewards over time. We anticipate that the upcoming release of Where Winds Meet will be a commercial success and a significant driver of growth in 2025 and beyond. Overall, we maintain NetEase’s fair value estimate at $158 (HKD 246) and consider the shares as undervalued.