NetEase's Successful Game Strategy: High-Quality Growth in Cloud Music and Youdou Services

Benchmark analyst Fawne Jiang maintains NetEase Inc NTES with a Buy and raises the price target from $104 to $118.
The re-rating followed the company's upbeat 1Q23 results.
Game growth in 1Q reflected the strong performance of Eggy Party on top of the resilience of legacy titles (FWJ and Identify V).
With multiple games (Badlanders, Racing Master, and Justice Mobile) slated to roll out in June and the international debut of Harry Potter: Magic Awakened this summer, the analyst sees improving visibility on game growth in FY23.
For non-game segments, NetEase has decided to focus on loss reduction and achieve a cash flow breakeven.
As a result, the analyst sees a substantial upside in profitability and has raised his FY23 non-GAAP EPADS to $5.53 (vs. $4.62 prior).
The outperformance of mobile games was underpinned by the strong performance of Eggy Party on top of the resilience of legacy titles.
The company will likely launch multiple games (Badlanders, Racing Master, and Justice Mobile) in June. In addition, they are planning Harry Potter: Magic Awakened international market debut in the summer.
With improved visibility on the games' launch schedule and the early success of Eggy Party, the analyst raised his FY23 game growth projection.
In addition, faster game revenue warrants higher profitability. Consequently, the analyst raised his FY23 gross profit margin for online games.
For its non-games segments (Cloud Music and Youdou), NTES has focused on high-quality growth by purging low-profit products and services, including reducing revenue sharing on social entertainment.
Citigroup analyst Alicia Yap maintains NetEase with a Buy and raises the price target from $115 to $118.
UBS analyst Felix Liu maintains NetEase with a Buy, raising the price target from $112 to $113.
Price Action: NTES shares traded higher by 5.56% at $90.50 on the last check Friday.

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