NetEase Earnings: Underlying Profitability Improves; Raising Fair Value Estimate 5% to $146

Narrow-moat NetEase's first-quarter earnings exceeded our and Refinitiv consensus expectations. We attribute strong margin performance during the quarter to a favorable revenue mix shift and the one-off timing benefit related to Activision Blizzard revenue recognition. Owing to NetEase's stacked game release schedule this summer, we remain upbeat on its financial performance going into the rest of this year. We have slightly raised our fair value estimate to $146 from $139. We find NetEase's valuation multiples do not recognize the company’s narrow moat, with the shares trading at 17 times price/consensus earnings and 11 times price/core earnings (after removing net cash from market cap and net losses from Cloud Music and Youdao from NetEase's bottom line). We continue to believe the current risk/reward profile is highly attractive.