NetEase Stock shows all the signs

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NetEase (NAS: NTES, 30-year Financials) stock appears to be significantly overvalued, according to GuruFocus Value’s calculation. The GuruFocus Value is GuruFocus’s estimate of the fair value at which the stock is to trade. It is calculated based on the historical multiples at which the stock has traded, past business growth, and analysts’ estimates of future business performance. If a share’s price is significantly above the GF value line, it is overvalued and its future performance may be poor. On the other hand, if it is significantly below the GF value line, its future return is likely to be higher. At its current price of $ 113.71 per share and market cap of $ 76.3 billion, NetEase stock is showing all signs of significant overvaluation. The GF value for NetEase is shown in the table below.

Given that NetEase is significantly overvalued, its long-term stock return is likely to be much lower than the future growth of its business, which has averaged 18.3% over the past three years and is expected to grow. by 18.35% per year over the next three to five years. .

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Since investing in companies with poor financial strength could result in a permanent loss of capital, investors should carefully consider the financial strength of a company before deciding to buy shares. Examining the cash-to-debt ratio and interest coverage can provide a good initial perspective on the financial strength of the business. NetEase has a cash-to-debt ratio of 4.56, which is around the average for companies in the interactive media industry. Based on this, GuruFocus ranks NetEase’s financial strength at 6 out of 10, suggesting a fair track record. Here is NetEase’s debt and cash flow over the past few years:

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Companies that have historically been profitable over the long term pose less risk to investors who want to buy stocks. Higher profit margins usually dictate a better investment compared to a business with lower profit margins. NetEase has been profitable 10 in the last 10 years. In the past twelve months, the company reported sales of $ 11.5 billion and earnings of $ 2.805 per share. Its operating margin is 18.53%, which ranks better than 74% of companies in the interactive media industry. Overall, NetEase’s profitability is ranked 9 out of 10, indicating strong profitability. Here is NetEase’s revenue and bottom line for the past few years:

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One of the most important factors in the valuation of a business is growth. Long-term equity performance is closely linked to growth, according to GuruFocus research. Companies that grow faster create more shareholder value, especially if that growth is profitable. NetEase’s average annual revenue growth is 18.3%, which ranks better than 66% of companies in the interactive media industry. The 3-year average EBITDA growth is 9.2%, which ranks among the average for companies in the interactive media industry.

A company’s profitability can also be assessed by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on Invested Capital (ROIC) measures how well a business generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company should pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely to create value for its shareholders. Over the past 12 months, NetEase’s ROIC is 17.79 while its WACC is 3.72. NetEase’s historical ROIC vs WACC comparison is shown below:

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In summary, the NetEase stock (NAS: NTES, 30-year Financials) appears to be significantly overvalued. The company’s financial position is fair and its profitability is solid. Its growth is in the mid-range of companies in the interactive media industry. To learn more about the NetEase share, you can view its 30-year financial data here.

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