NetEase.com Showing Its Age
NetEase.com, Inc. (NTES) is one of the leading providers of online gaming, advertising, web-based communication services, and a variety of interactive content in China.
NetEase is currently trading at 16.8x estimated 2008 EPADR of $1.56, a discount to the industry. Rolling our valuation to fiscal 2009 EPADR estimate of $1.74, the company is trading at 15.1x, which is far below the industry average. NetEase faces intense competition in the gaming and advertising market. Delayed product launches and growing operating expenses have hurt profitability.
NetEase appears to have turned the corner, posting better-than-expected revenue and earnings results in the first half of 2008. The company's solid execution in its online games and advertising business has helped NTES grow its top and bottom line. We believe that China's online gaming and advertising industry is in the midst of unparalleled growth and NetEase is well positioned to benefit from this trend.
Although the company is executing well currently, we are concerned that the bulk of its revenues come from relatively old game titles. We therefore maintain a Hold rating on NTES shares. We set our six-month price target to $27.50. This price is based on a P/E multiple of 15.8x our 2009 EPADR estimate of $1.74, which is much lower than the industry mean and median. NTES is trading at a discount to its peers, reflecting the company's growth prospects into 2008 as well as 2009.
Neurocrine Bio a Buy Under $5
We have long stated that Neurocrine Biosciences Inc.'s (NBIX) stock is stuck in a tight trading range until investors get an update on both elagolix and indiplon. We got the first update in early September when the management released very positive phase II data from the PETAL study on GnRH (gonadotropin-releasing hormone) antagonist elagolix. This encouraging data for the treatment of endometriosis should lead to the signing of a major partnership for pivotal trials in 2009.
As for insomnia drug indiplon, we assume the product is eventually discontinued in the U.S.' However, with elagolix now taking center stage, Neurocrine is well positioned to outperform in 2009.' We still believe that investors can be patient while additional elagolix becomes available, but we are moving our price target to $8, from $6, on the increased likelihood that a deal for elagolix gets done in the next several months.
Investor focus has now squarely turned to elagolix. Data from the PETAL Study provided a small pop to the shares. The management remains in discussions with multiple pharmaceutical companies on a potential development partnership. We are not expecting a deal to get done until after all the phase II becomes available in 2009. This represents the biggest near-term catalyst.
That said, the name is attractive from a long-term stand point, and becomes more interesting as elagolix phase II data comes out.
