NetEase Inc. (NASDAQ:NTES): A Peter Lynch GARP Case Study

For investors looking for a disciplined, long-term way to build wealth, few strategies have the substance of Peter Lynch's method. The famous manager of Fidelity's Magellan Fund supported investing in what you understand, concentrating on companies with lasting growth, sound financial condition, and fair valuations. His structure is not about following speculative trends but finding well-managed businesses that can be owned for years. A primary instrument for this is the "GARP" (Growth at a Reasonable Price) screen, which searches for companies with good historical earnings growth, high profitability, and a valuation that does not overpay for that growth.

One company that recently appeared from such a screen is NETEASE INC-ADR (NASDAQ:NTES), a Chinese technology leader most recognized for its online games and value-added services. For investors who follow Lynch's ideas, NetEase presents an interesting case study of a business that seems to mix growth, quality, and price.

Fit with Lynch's Main Standards

Peter Lynch stressed lasting growth, financial strength, and good valuation. A screen built on his strategy uses particular numerical filters, and NetEase's profile matches these standards closely.

• Lasting Earnings Growth: Lynch preferred companies increasing steadily, not suddenly. He frequently searched for a 5-year earnings per share (EPS) growth between 15% and 30%, as growth above that can be hard to continue. NetEase's EPS has increased at an average yearly rate of 17.5% over the past five years, putting it directly within this preferred "lasting" range.
• Profitability and Efficiency: A high Return on Equity (ROE) was a Lynch priority, showing management's skill at creating profits from shareholder money. NetEase's ROE of 23.2% is much higher than the 15% level often used in Lynch screens, indicating high profitability.
• Careful Financial Condition: Lynch was cautious about high debt. His screens often need a Debt-to-Equity ratio below 0.6, with a liking for even smaller numbers. NetEase's very low ratio of 0.05 shows a balance sheet paid for almost completely by equity, giving notable strength against economic declines.
• Short-Term Cash Position: The Current Ratio checks a company's ability to pay its short-term bills. A ratio above 1.0 is seen as good, and NetEase's strong ratio of 3.42 points to sufficient cash and financial steadiness.
• Fair Valuation (The "P" in GARP): Maybe most important for Lynch was not paying too much for growth. The PEG ratio (Price/Earnings to Growth) helps judge this by comparing the P/E ratio to the growth rate. A PEG at or below 1.0 can mean the market is not overpricing future growth. NetEase's PEG ratio, based on its past five-year growth, is about 0.95, meaning its present stock price may give a fair entry point for its historical growth path.

A Summary of Basic Financials

A closer look at NetEase's basic financial report strengthens the image shown by the Lynch screen. ChartMill gives NTES a good total basic financial rating of 7 out of 10. The company's clear strong points are in two key areas Lynch thought were very important: profitability and financial condition.

• Profitability Leader: The company gets a 9 out of 10 for profitability. It has top-tier margins, with a Profit Margin of 32.5% and an Operating Margin of 31.6%, doing better than most of its entertainment sector counterparts. Its Return on Invested Capital (ROIC) of 17.6% also places near the best in the industry, confirming good use of money.
• Strong Balance Sheet: With a health score of 8, NetEase's financial standing is solid. Its very small debt amount is paired with good cash measures. The company also has a record of lowering its share count through buybacks, another good sign Lynch liked, as it can raise per-share value for continuing shareholders.
• Valuation Background: The valuation score of 7 indicates the stock is not priced too high, especially compared to its industry. Its P/E and forward P/E ratios are lower than most rivals and are below the present average for the S&P 500. This agrees with the PEG ratio's suggestion of a fair price for its quality and growth picture.

You can see the full basic financial study for NetEase here: NTES Fundamental Report.

Points for the Long-Term Investor

While the Lynch-style screen shows notable strong points, a complete study needs recognizing the full situation. The company's growth view shows a varied image. While revenue growth is thought to stay good, analyst forecasts point to a possible near-term drop in EPS growth. This highlights Lynch's demand to know the "reason" behind the numbers, in this case, maybe because of investment periods or market situations, rather than using screens only. Also, as a China-based ADR, investors must think about geopolitical and regulatory risks specific to the area, which are elements outside a pure numerical screen.

Ending Notes

For investors looking for a GARP method influenced by Peter Lynch, NetEase Inc. gives a notable profile. It shows the qualities Lynch valued: a history of steady, double-digit earnings growth, high profitability measures, a very strong balance sheet with little debt, and a valuation that seems fair compared to its past results. The company works in the clear, though competitive, area of interactive entertainment, a field with continuing long-term need.

As usual, a screen is a beginning for study, not the finish. NetEase's match with these classic value-and-growth filters makes it a main choice for more careful checking within a mixed, long-term portfolio.

Find Other Possible Choices: The Peter Lynch strategy screen that found NetEase can provide other investment ideas. You can look at the present screen results and change the standards to match your own study here: Peter Lynch Strategy Stock Screen.

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Disclaimer: This article is for information only and does not make up financial guidance, a suggestion, or an offer to buy or sell any securities. The study is based on data and a particular investment strategy screen, it is not a replacement for your own study and thought of your personal financial position, risk comfort, and investment goals. Always do your own careful checking or talk with a qualified financial advisor before making any investment choices.