NetEase[ticker symb=NTES] stock plunged by double digits Thursday after the China-based gaming and Internet company saw its gross margin shrink in Q4, even as its revenue and earnings beat analyst expectations. After falling after hours Wednesday following the company’s earnings release, NetEase stock was down 16% in midday trading in the stock market today, near 134. Still, NetEase stock is up 31% over the past 12 months and is ranked No. 3 in Wednesday’s midweek update of the IBD 50 list of top-performing stocks. This is despite a tough time for many Asian stocks. Amid ongoing worries about slowing growth in China, the Shanghai composite fell more than 6% Thursday, its biggest drop in more than a month. NetEase posted a gross profit margin for its online games business of 67.2% in Q4, down from 67.9% in Q3 and 76% in Q4 2014, with the declines mainly due to increased revenue contributions from lower-margin mobile games. The company said revenue from online games, its biggest segment, more than doubled, thanks to growth in its original mobile games. The company’s “Westward Journey Online” and “Fantasy Westward Journey” came in as the top two games in the Apple[ticker symb=AAPL] iOS China app store in the fourth quarter, NetEase said.
NetEase Now Has 80-Plus Mobile Games
NetEase has been keeping up “a very good momentum of rolling out the games, especially the mobile games, to the market. And if you look back in the past quarter, which is the fourth quarter of 2015, we have come up to 80-plus mobile games in the market. That’s compared to about 50-plus in the third quarter of 2015,” NetEase acting CFO Onward Choi told analysts during an earnings call late Wednesday. “We saw year-over-year net revenue increases in the fourth quarter of 103.2% from online games, 68.1% from advertising services and 355.5% from email, e-commerce and others,” NetEase CEO William Ding said in a statement. Fourth-quarter revenue jumped 128% in local currency to RMB 7.90 billion ($1.22 billion), above the RMB 7.69 billion analysts polled by Thomson Reuters had forecast. The company said earnings per American Depositary Receipt were RMB 16.34 ($2.52), up 69% in local currency. Analysts had expected RMB 14.79. NetEase did not provide Q1 guidance. Analysts polled by Thomson Reuters expect net revenue to rise 126% in local currency to RMB 8.27 billion ($1.26 billion). Analysts expect adjusted earnings per share to rise 45% to RMB 13.97 ($2.14). NetEase is best known for its desktop PC games and has had a lucrative exclusive license for Activision Blizzard’s[ticker symb=ATVI] “World of Warcraft” in mainland China since 2009. The company also develops its own games, mostly the multiplayer variety played on desktop PCs and mobile devices. NetEase is a home-field favorite on China’s gaming scene, ranking a close second to Internet titan Tencent Holdings[ticker symb=TCEHY]. Looking to bring its most popular titles to more English speakers, Beijing-based NetEase opened its first U.S. office, in the San Francisco suburb of Redwood Shores, Calif., early last year. Among other Chinese names, online-discount retailer Vipshop Holdings[ticker symb=VIPS] was down 12% in midday trading Thursday after reporting better-than-expected fourth-quarter earnings but weaker first-quarter revenue guidance. Vipshop is facing more competition in the flash discount sales category from Alibaba Group[ticker symb=BABA] and JD.com[ticker symb=JD]. Alibaba’s U.S. stock was down 1.5% midday Thursday, while JD.com was down 3.5%.
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