NetEase’s Strong Earnings Overcast by Cautious Near-Term Outlook; Shares Undervalued

Narrow-moat NetEase's second-quarter results were ahead of our and PitchBook consensus expectations, but management struck a cautious tone for the second half. We surmise that the initial performance of the firm's new mobile game, Diablo Immortal, is running below expectations, and the shortage of game licenses is also going to limit NetEase's new game releases for this year. As a result, we lower our 2022 revenue and net profit forecasts, but maintain a USD 139 (HKD 216) fair value estimate for NetEase as our long-term forecasts remain intact. The firm's shares are undervalued, and we would treat volatility in the stock as an opportunistic entry point.