NetEase awaits new explosive products

Author: Huang Yu

Editor: Zhou Zhiyu

Last year, thanks to the outstanding performance of the mobile games "Egg Party" and "Justice", NetEase's stock price rose against the market trend, with a total market value exceeding Meituan at one point, becoming the fourth largest internet company in China.

This year, NetEase's performance has been lackluster despite the overall rise of Chinese concept stocks. It urgently needs a new blockbuster game to boost market confidence.

On May 23, NetEase released its first quarter financial report for 2024. The data shows that NetEase achieved a revenue of approximately 26.9 billion yuan in the first quarter, a year-on-year increase of 7.2%; non-standard attributable net profit was 8.5 billion yuan, a year-on-year increase of 12.5%. The growth rate has significantly declined from the previous quarter's 53.4%, but it is basically in line with market expectations.

Currently, NetEase has four main segments: games, education, NetEase Cloud, and innovation and other businesses. However, games remain the pillar and the most closely watched business segment by the public.

Over the past three years, revenue from NetEase's games and related value-added services has remained stable at around 80%. This revenue structure did not change significantly in the first quarter of this year, with net revenue from games and related value-added services reaching 21.5 billion yuan, a year-on-year increase of 7%, accounting for approximately 79.92% of total revenue, an increase of 2.83 percentage points from the previous quarter, but a slight decrease year-on-year.

As a global gaming giant, NetEase's gaming revenue growth rate has slowed down, but it continues to outperform Tencent, especially in the mobile gaming sector.

In NetEase's gaming and related value-added services, revenue from mobile games accounts for over 70%, with a year-on-year increase of 19.41% to 16.058 billion yuan in the first quarter. Despite a high base, the deferred revenue still increased by 15% year-on-year and 12% quarter-on-quarter. However, due to industry trends, revenue from PC games showed weakness, decreasing by 15.15% year-on-year to 4.372 billion yuan.

The strong performance of mobile games mainly relies on multiple long-operating games, such as "Fantasy Westward Journey" mobile game achieving a record high revenue in Q1, popular games like "Justice" and "Egg Party" maintaining top sales rankings, and "Identity V" achieving record high revenue in Q1 and DAU in May.

However, the highly anticipated cross-platform game "The Legend of the Condor Heroes", which was launched at the end of March this year, did not make a big splash in the market.

During the financial report conference, NetEase CEO Ding Lei admitted that the company was not particularly satisfied with the performance of "The Legend of the Condor Heroes". There are now new leaders and core members working on the next version. The new version of "The Legend of the Condor Heroes" will be launched during the summer vacation, with NetEase enhancing the game's fun, multiplayer social features, and making adjustments to the art style.

In addition to new games, the long-running PC game "Fantasy Westward Journey", which has been online for over 20 years, has recently faced some questioning regarding adjustments to certain gameplay rules.

Ding Lei stated that these adjustments were made based on the long-term product operation strategy and are expected to be completed in the first half of this year. The goal is to meet player demands and make the game more popular At the same time, Ding Lei also welcomed players of the PC version of "Fantasy Westward Journey" to provide more suggestions and feedback to the development team, stating: "We will humbly listen to the opinions of users, incorporate more innovation and interesting content into the product. The entire company values the future of this product greatly."

After a relatively quiet first quarter, NetEase needs to launch new games that can make a splash in the market. This will determine whether it can drive performance growth and boost its stock price once again.

Games like "Yan Yun Sixteen Sounds" and the mobile version of "Eternal Return" are currently receiving a lot of attention at NetEase.

Regarding the progress of the full-platform release of "Yan Yun Sixteen Sounds" game, Ding Lei revealed that the PC version is ready for public testing, while the mobile version's resources and content are also prepared and undergoing performance optimization and testing, expected to be launched slightly later than the PC version.

It is understood that the domestic public testing of "Yan Yun Sixteen Sounds" is scheduled to start on July 26th. In addition, preparations for the overseas release of this product are also underway.

Regarding the feedback from the testing of the mobile game "Eternal Return" and the expected launch time, NetEase management stated: "After multiple tests, we have felt the players' great anticipation for this game. The development team has also verified the innovation in gameplay and playability on mobile, further boosting confidence."

At the same time, he revealed that the mobile game "Eternal Return" is undergoing final optimizations before launch, with an expected launch date during the summer vacation.

This summer, NetEase will undoubtedly attract a lot of attention. In April, NetEase upgraded its collaboration with Microsoft Games and announced a "reunion" with Blizzard Entertainment. Blizzard's first returning game is expected to launch this summer, sparking high expectations.

Some industry insiders believe that after the previous situation where Blizzard wanted to increase revenue sharing but negotiations broke down, and no one took over, it is expected that the revenue sharing agreement between NetEase and Blizzard will be more reasonable, and NetEase may obtain a more favorable revenue sharing ratio. Starting next year, as NetEase's overseas studios gradually release new products, and with new games and Blizzard contributing to annual revenue, performance growth is expected to accelerate significantly.

However, there are differing opinions in the market regarding NetEase's future performance.

Macquarie issued a report giving NetEase an "outperform" rating, stating that NetEase continues to demonstrate strong game development capabilities, and the valuation gap with other gaming industry peers has significantly widened. The stable product line in the second half of the year is expected to accelerate growth momentum.

On the other hand, Morgan Stanley believes that NetEase's growth and profit prospects for the rest of the year will weaken, due to the soft macro environment affecting the performance of traditional gaming businesses, increased competition, and potential regulatory impacts, which will affect the potential revenue and capital return rate of existing and future games.

Additionally, Morgan Stanley mentioned that after NetEase releases the mobile game "Eternal Return" in the summer, the visibility of the game pipeline is not high.

In conclusion, in order to avoid becoming a "problem child" among Chinese concept stocks, NetEase must take stronger measures to create another hit game like "Onmyoji" and "Justice"