Publish date:

Under-the-Radar Tech Stock for Today

NetEase has a foot in two worlds: technology and emerging markets, which are posting the best returns.

"Under-the-Radar Stocks" is a daily feature that uncovers little-known companies worthy of investors' consideration. Check in at 5 every morning to find out about stocks that tend to beat their bigger brethren.

Technology and emerging markets are big winners in the stock-market rally. The tech-heavy Nasdaq has risen 44% from its March 9 low, and the

iShares MSCI Emerging Markets Index

(EEM) - Get iShares MSCI Emerging Markets ETF Report

has climbed 60%, beating the

Dow Jones Industrial Average

and the

S&P 500 Index


Why not seek investments that offer dual exposure? Beijing-based

(NTES) - Get NetEase, Inc. Sponsored ADR (NTES) Report

has American Depositary Receipts (ADRs) that fit the bill. NetEase is China's second-biggest online games provider, offering not only games but also Internet portals and wireless services. (

Activision Blizzard

TheStreet Recommends

(ATVI) - Get Activision Blizzard, Inc. Report

is the world's largest video-game publisher.)

Image placeholder title

The company's main source of revenue is online games, which generated about $106 million, or 93%, of the total. MMPORGs, or multi-player online role-playing games, are popular in China. To pay for MMORPG playing time, players use a proprietary prepaid point system by purchasing physical point cards or virtual point cards online. NetEase also sells advertising space on its Web sites, which got average daily page views of 640 million in December 2008.

The company's first-quarter revenue rose 24% to $114 million, and earnings per share increased at more than twice that pace. That superb performance is credited to decoupling, the notion that China's economy is no longer dependent upon Western growth, as well as surging Internet adoption in Chinese metropolitan areas.

In addition to strong operating performance, NetEase has a clean balance sheet. The company holds $883 million of cash reserves and has no debt. Its high margins, sound financial position and growth potential make NetEase an attractive stock. But an obvious negative is the company's no-dividend policy.

Despite strengths, NetEase is undervalued. It trades at a discount in the Internet software and services industry. With a price-to-earnings ratio of about 19, it's 38% cheaper than its average peer. By comparison,

(AMZN) - Get, Inc. Report

is trading at a P/E ratio of more than 50. However, looking at per-share sales, book value and cash flow, NetEase is relatively expensive.

So far in 2009, shares of NetEase have surged 62%, outperforming all major U.S. indexes. In terms of growth potential, NetEase is sitting pretty for two reasons: Online gaming is extremely popular in China, and Internet adoption is increasing.

The China Internet Network Information Center said the nation's online population increased 42% to more than 298 million users in 2008, though penetration remains low at 22%. That means there's tremendous growth potential over the next five years.

NetEase has held a "buy" recommendation from Ratings since June 2007.

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.