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NetEase (NASDAQ:NTES) shares rose Wednesday after Morgan Stanley analysts raised the firm’s price target on the stock to $95 from $85.
The analysts, who reiterated an Overweight rating on the stock, told investors in a research note that now is the “best opportunity to accumulate NetEase for the next product cycle starting in 1H23.”
“We think the next product cycle starting in 1H23 will drive a re-rating from its current 7- year low valuation of 14x 2022e P/E (core 9x ex-cash) and 7-8% FCFF yield with US$5bn buyback over 2023-25,” wrote the analysts.
“We think investor positioning in NTES remains light given: 1) it is not macro/reopening sensitive; and 2) growth is decelerating in 4Q22 and 1Q23 due to the end of its last product cycle with Diablo Immortal in 3Q22, and the termination of the agreement with Blizzard in Jan 2023, respectively,” they added.
The analysts added that the company also has a stable margin through 2024, and although R&D expense could compress game margins in 2023 due to overseas expansion, they see offsetting factors from:
“1) channel fee optimization as games hit three-year-high GPM of 65.0% in 3Q22; 2) 1ppt benefit from termination of Blizzard agreement; 3) upfront costs optimization for game development/release; 4) non-game segment margin improvement. Headcount has been stable at 30-31k over the last 4-5 quarters.”
