NETEASE INC-ADR (NASDAQ:NTES) – A Quality Stock with Strong Fundamentals

NETEASE INC-ADR (NASDAQ:NTES) stands out as a compelling pick for quality investors, meeting stringent criteria based on revenue growth, profitability, and financial health. The company operates in China’s entertainment sector, with a diversified business spanning gaming, online music, education, and e-commerce. Our Caviar Cruise screen identified NTES due to its strong fundamentals, which we’ll examine below.

Key Strengths of NTES

• Revenue and Profit Growth: Over the past five years, NTES has delivered a revenue CAGR of 9.59%, while EBIT growth has been even stronger at 16.49%. This indicates improving operational efficiency and pricing power.
• High Return on Invested Capital (ROIC): With an ROIC (excluding cash and goodwill) of 129.21%, NTES demonstrates exceptional capital allocation, far exceeding the 15% threshold for quality stocks.
• Strong Cash Flow and Low Debt: The company’s debt-to-free cash flow ratio is just 0.25, meaning it could repay all debt in under four months using current cash flows. This reflects a robust balance sheet.
• Profit Quality: NTES converts net income into free cash flow at an impressive rate, with a five-year average profit quality of 132.69%, well above the 75% benchmark.

Valuation and Market Position

Despite its strong fundamentals, NTES trades at reasonable multiples:

• P/E of 16.93, below both industry and S&P 500 averages.
• Price/Free Cash Flow is cheaper than 83% of peers.

Analysts expect revenue growth to continue at 9.59% annually, though EPS growth may face near-term headwinds.

Fundamental Analysis Summary

Our full report rates NTES 7/10, highlighting:

• Profitability: Scores 8/10, with industry-leading margins (30.2% operating margin).
• Financial Health: Scores 8/10, with low debt and high liquidity.
• Dividend: A 2.14% yield with a sustainable payout ratio.

For more quality stocks, explore our Caviar Cruise screener.

Disclaimer

This is not investment advice. Always conduct your own research before making investment decisions.