Why NetEase, Inc. Stock Climbed 20% in October

By Asit SharmaFool.com

What:Shares ofNetEase,rose 20.3% during the month of October, according to data fromS&P Capital I.Q..

So what:The Chinese online interactive community's stock was buoyed by a resurgence of interest in Chinese stocks after a brutal sell-off this summer, as well as anticipation of the company's third-quarter 2015 earnings report, released Nov. 12.

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It may be easiest to grasp October's surge in the "NTES" ticker by revisiting the plunge in Chinese stocks that made headlines a few months ago. Below is a chart of the Shanghai Composite Index for the months of June through September, overlaid with NetEase's trend line over the same period. As you can see, NetEase, the shares of which trade as American depositary receipts (ADRs) on the New York Stock Exchange, mirrored the fortunes of the broader market, although investor enthusiasm around the company softened the impact:

^SSEC data by YCharts.

In October, the Shanghai Composite, which is a decent proxy for the overall Chinese market, recovered considerably, and it didn't take much for NetEase to regain its lost ground as well:

^SSEC data by YCharts.

Now what: As I mentioned above, buying interest also ticked up toward the end of the month in anticipation of NetEase earnings. It turns out investors had good reason to bid up shares: The company's Nov. 12 report revealed a revenue increase of 114% against the prior-year quarter, to $1.05 billion. Net income similarly experienced a leap, rising 63% to $296 million.

NetEase operates in three major segments: online gaming, advertising services, and email and e-commerce services. Of the three, online gaming is by far the largest and carries the most impact: Revenue grew 125% to $820.2 million.

The company attributed its gaming strength to self-developed titles like "Westward Journey Online" and "Fantasy Westward Journey," which per management, currently hold the No. 1 and 2 spots for gross revenue in the iOS China app store. NetEase'searnings filing also confirmed the release of its highly anticipated "Kung Fu Panda" title, which will be available for download in late November. Finally, alongside its own titles, management cited the continued strength of licensed products in its gaming segment, including Blizzard Entertainment's"Heroes of Warcraft" and "Diablo III."

While gaming revenue is clearly propelling the business, gaming gross profit margin actually declined, from 77.2% last year, to 67.9% this quarter. This was attributed to the growth in mobile games, which have a lower profitability margin in comparison to the company's total online gaming portfolio. But investors surely are taking this in stride. When a company is able to scale its top line by over 100% in a single quarter, shareholders can stomach a few points of slippage in gross margin.

The article Why NetEase, Inc. Stock Climbed 20% in October originally appeared on Fool.com.

Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends NetEase.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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