NetEase ( NASDAQ: NTES ) shares fell on Tuesday even as investment firm Macquarie started coverage on the Chinese tech company, noting it is the "best in class integrated gaming company" in the country.
Analyst Esme Pau initiated NetEase ( NTES ) with an outperform rating and a $129 per-share price target, implying a 38% return from current levels, noting that overseas expansion, quality intellectual property and the continued growth in its services business should help boost earnings.
"NetEase is one of the best-in-class integrated gaming companies with a principal focus on game development and is the second-largest online game publisher by revenue in China," Pau wrote in a note to clients, noting revenue grew at an annual compound rate of 28% from 2011 to 2021. More recently, NetEase ( NTES ) revenue grew 15% in the first-quarter of 2022, compared to just 3% for the sector, due to strength in its titles.
"We believe NetEase deserves a valuation premium versus its Chinese and international peers, due to its superior in-house game development capability and a multi-year growth trajectory," Pau added.
NetEase ( NTES ) shares fell nearly 3% to $90.76 in early trading.
In addition, Pau noted that NetEase ( NTES ) is likely to continue growing in Japan and it recently launched its first U.S.-based studio, which should provide "new growth drivers" diversify the risk away from China, which has been stringent with its regulations on tech companies.
Even though titles from NetEase ( NTES ) -- as well as Tencent ( OTCPK:TCEHY ) -- were not included on the latest list of approved games from the Chinese government, Pau added that the company is likely to boost its market share in China, likely due to consolidation.
"We believe NetEase’s robust game IPs and its superior product quality will enable it to enjoy a domestic market share gain of up to 21% in [estimated 2022] (19% in 2020) amid the stringent game licensing regime," Pau wrote.
Lastly, the delayed launch of Diablo Immortal in China could be manageable, given NetEase ( NTES ) has a low share of its partnership with Activision Blizzard ( ATVI ), the creator of the Diablo series.
Last month, NetEase ( NTES ) shares fell sharply after it was reported that Diablo Immortal would be delayed from its original June 23 release date and no new date was provided .
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NetEase falls even as Macquarie calls it 'best in class,' sees nearly 40% upside