Why NetEase Stock Fell 11% in August

MarketsMotley Fool

What happened

Shares of NetEase (NASDAQ: NTES) declined 11.4% last month, according to data provided by S&P Global Market Intelligence, after the Chinese internet technology company's second-quarter earnings fell a bit short of investor expectations.

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So what 

NetEase's revenue soared 49.4% year over year, to 13.4 billion Chinese renminbi (RMB), or roughly $2 billion. These gains were fueled by a 46.5% jump in online game services revenue and a 68.9% surge in e-commerce sales.

"Our total net revenues grew nearly 50% in the second quarter compared with last year as we continued to invest in new content development that broadens our offering and engages our community across our business lines," CEO William Ding said in a press release.

Those investments, however, dented margins, leading non-GAAP earnings per American depositary share (ADS) to rise only 7% year over year to $3.86. That was well below the $4.82 NetEase earned in the first quarter and lower than Wall Street's expectations of $4.02.

Now what 

NetEase's management is wisely sacrificing short-term profits in order to position the company for long-term success. China's online game market is massive and growing rapidly, so NetEase's move to expand its game lineup is shrewd. E-commerce is another exciting growth market in China, and NetEase's aggressive investments in this area are helping it take share here, too.

There will come a time when it will be prudent for NetEase to focus more on its margins and overall profitability, but that time is not now. The company knows this, and it's doing what it needs to do to win in the Middle Kingdom in the decade to come. Thus, patient, long-term-minded investors my wish to use the opportunity created by NetEase's August sell-off to initiate -- or add to -- a position in this intriguing growth story.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NetEase. The Motley Fool has a disclosure policy.