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NetEase ’s share price on May 18 and 19, source: Tiger Securities

This is not the first time. In the past two years, when people looked at business stars with magnifying glass, or when breaking fingers to count the giants, they always used to ignore NetEase. NetEase also seemed to get used to being out of the spotlight. This is not consistent with its performance in the capital market in the past year.

On May 20, NetEase released its first quarter earnings report for 2020, which may be able to find some reasons.

Without burning money, where does growth come from?

Look at the overall data first.

The financial report shows that NetEase ’s Q1 net income in 2020 was 17.06 billion yuan, up 18.3% year-on-year and 8.4% month-on-month. baseDue to non-US GAAP, the net profit attributable to NetEase ’s shareholders was 4.21 billion yuan, an increase of 25.7% year-on-year and 15.0% month-on-month. Revenues and net profits are higher than the consensus consensus of analysts compiled by Bloomberg.

NetEase 2020Q1 performance highlights, source: financial report

In the case of steady increase in revenue and net profit, cost control is reasonable. According to the financial report, operating expenses for the first quarter of 2020 were 4.89 billion yuan, down 6.5% from the previous quarter. Among them, research and development expenses accounted for 43.8%, sales and marketing expenses accounted for 38%, and management expenses accounted for 18.1%. R & D expenses account for nearly half of expenditures, meaning that the company’s revenue growth depends more on the product’s own capabilities than on mass market launches.

NetEase ’s 2019Q1-2020Q1 operating expense composition and trend chart, source: financial report

In fact, NetEase has been more cautious in controlling costs. In 2019, Netease’s total operating expense ratio increased by only 2.3% year-on-year when the overall revenue growth was 15.8%. Burning money is definitely not Ding Lei’s style.

After the financial report was released, market sentiment was good. Driven by financial reports, NetEase shares rose nearly 3% after the market.Investment bank Benchmark raised NetEase’s stock price target to $ 435.

There is a view that all this began when NetEase sold Koala to Ali. Asset-heavy e-commerce tracks have caused NetEase’s profits to fall sharply, causing stock prices to oscillate at a relatively low point for up to two years.

Netease ’s stock price trend in the past 6 months, source: Snowball

After the sale of koalas, diversification and asset lightness have brought NetEase back to growth. In addition to the very small proportion of digital advertising revenue, Youdao, cloud music, and games are all driven by subscription subscriptions. This business model is less affected by the slowdown of macroeconomic growth. The growth is stable and sustainable, and it is the type that capital markets prefer now.