With the outstanding performance of the main game industry, NetEase will become the biggest winner in 2023, when China's Internet industry is in turmoil.
On the evening of February 29th, NetEase (09999. HK; NTES. NASDAQ) released its financial reports for the fourth quarter and full year of 2023. The data shows that its revenue in the fourth quarter was 27.1 billion yuan, a year-on-year increase of 7%; The net profit from continuing operations attributable to the parent company was 7.4 billion yuan, a year-on-year increase of 53.17%.
From the 2023 annual revenue, NetEase's revenue exceeded the 100 billion mark for the first time, with a daily average revenue of 283 million yuan, a year-on-year increase of 7.2%; Under non GAAP accounting standards, the net profit attributable to continuing operations was 32.6 billion yuan, a year-on-year increase of 42.98%. It is absolutely an enviable achievement in the Internet industry. At present, the Internet industry is entering a new round of value revaluation and paradigm reconstruction under the baton of "cost reduction and efficiency increase", but NetEase, the "second in a thousand years", will surpass Meituan in market value in 2023 and become the fourth largest Internet company in China through the counter attack of games. Since 2024, NetEase's Hong Kong and US stock prices have both risen by over 20%, making it one of the best performing Chinese concept stocks.
The biggest driving force behind the rise of NetEase's stock price and performance comes from the growth of its gaming business. According to the financial report, NetEase's gaming revenue in 2023 was 81.6 billion yuan, accounting for 79% of the total revenue. Among them, the large DAU (daily active user) game "Egg Party" held by it has a registered user of up to 500 million, making investors have a high valuation of NetEase. During the recently passed Spring Festival holiday, students on vacation can be seen everywhere immersed in "Egg Party", which has also helped NetEase's leading product achieve a new high of over 40 million DAUs.
However, some investors are also concerned about this financial report: in the fourth quarter of last year, NetEase's sales and marketing expenses increased by 23.5% year-on-year to 4.2 billion yuan, but the revenue of its gaming business only increased by 9.6% year-on-year, resulting in NetEase's Q4 net profit lower than market expectations. In addition, NetEase announced in its financial report that it will add a minor mode to its entire gaming product line, which is feared to significantly weaken the appeal of Egg Party among young players.
On February 29th, NetEase's US stock price plummeted by 3.88%, and on March 1st, the Hong Kong stock market opened with a drop of over 4%, closing down 1.93%.
Top selling games drive growth
Overall, NetEase's gaming business, which accounts for the largest proportion of performance, achieved an annual revenue of 81.6 billion yuan, NetEase Cloud Music achieved an annual revenue of 7.9 billion yuan, NetEase Youdao achieved an annual revenue of 5.4 billion yuan, and the innovation and other business sectors achieved an annual revenue of 8.6 billion yuan. The gaming sector, which has received the most attention from the capital market, continues to contribute impressive data, with an increase of 9.4% compared to 74.566 billion yuan in 2022.
In the financial report, Ding Lei, founder and CEO of NetEase, emphasized that 2023 is a milestone year for NetEase Games to break through category innovation, and its game product line has become more diverse and diverse.
NetEase's self-developed "Egg Party" is undoubtedly Ding Lei's "innovative breakthrough". NetEase recently disclosed data showing that the registered users of "Egg Party" have exceeded 500 million, with a peak DAU of over 40 million, making it the highest DAU game in NetEase's history.
Benefiting from the hot performance of Egg Boy Party, NetEase remained stable when the share prices of its competitors nearly halved, becoming one of the few Chinese Internet companies whose share prices grew in the past year.
In addition to "Egg Party", Ding Lei further pointed out that NetEase has also launched sub category products such as "Against Water Cold", "Peak Speed", and "All Star Street Ball Party". NetEase previously disclosed data showing that "Against Water Cold" mobile game has attracted over 100 million active users and sold over 100 million 6-yuan fashion props in the third quarter of 2023 through the industry's first MMO "per capita small payment" business model.
Benefiting from the excellent performance of games such as Egg Boy Party, NetEase remained stable and became one of the few Chinese Internet companies whose share prices increased in the past year when the share prices of a number of competitors nearly halved.
Taking the Hong Kong stock market as an example, in 2023, NetEase's overall market value has risen from HKD 389.481 billion at the beginning of the year to HKD 485.79 billion at the end of the year, an increase of over 24.7%. In 2024, the increase is still continuing. As of the close on February 29th, NetEase quoted HKD 176.2 per share, with a total market value of HKD 568.002 billion, an increase of 45.8% compared to the beginning of 2023.
A few years ago, in an interview with Wu Xiaobo, Ding Lei expressed disdain for various O2O trends such as bike sharing in the early years. "NetEase's most important thing is to do what they are good at.". NetEase has been performing well in its gaming industry recently, and Ding Lei's net worth has skyrocketed in the past year. According to the Bloomberg Rich List, benefiting from the rise in stock prices, NetEase founder Ding Lei's net worth has increased by over $4 billion this year, surpassing Jack Ma and Li Jiacheng, and ranking fifth on the China Rich List.
In contrast, those Internet giants whose market value was several times that of NetEase have suffered more impacts in 2023.
As of the close on February 29th, Meituan (03690. HK) closed at HKD 79.8 per share, with a total market value of approximately HKD 497.53 billion, a decrease of 54.5% from HKD 1094.918 billion at the beginning of 2023; JD (09618. HK) closed at 89.05 per share, with a total market value of approximately HKD 283.15 billion, a decrease of 59.6% from HKD 702.163 billion at the beginning of 2023.
On December 14, 2023, Netease quietly surpassed Meituan in market value, becoming the fourth largest Internet company in China in market value, behind Tencent, Alibaba and Pinduoduo. Afterwards, NetEase's stock price briefly collapsed due to policy adjustments, falling back to fifth place in market value.
But after the Spring Festival, NetEase's stock price quickly recovered and gradually widened the gap with Meituan. Up to now, NetEase has been the fourth largest Internet market in China for more than a month in a row, returning to the first tier.
"Egg Party" Accelerates Launch and Acquiring Users
Being popular can sometimes be a challenge. NetEase, which used to lack big DAU games, boasted and raised its eyebrows with its "Egg Party", but also faced significant pressure to protect minors as a result. Last year, "Egg Party" was embroiled in controversy, with the Shanghai Consumer Protection Commission repeatedly issuing articles requesting an explanation for the issues with the anti addiction system.
In addition, cases of minors using their guardian information to register accounts and requesting parents to bypass the "anti addiction" system on behalf of others are not uncommon, leading to disputes over game recharge and refund for minors. According to the data of the 2023 China Mobile Internet Annual Report released by the market research organization QuestMobile, in December 2023, the proportion of people born after 00 in the Egg Boy Party reached 26.3%, which means that one player in every four players is a young player, and the user structure shows an obvious trend of aging. Even scammers have targeted underage players in the game, making it difficult for parents and game developers to prevent. The Public Security Bureau of Changyuan City, Henan Province has also established a special working group to handle fraud cases related to "Egg Boy Party".
In order to consolidate its gaming advantages, NetEase is also accelerating its investment in "Egg Party" to gain more users. From the financial report, it can be seen that in the fourth quarter, NetEase allocated a huge budget for marketing and promotion. The sales and marketing expenses for the quarter increased by 23.5% year-on-year to 4.2 billion yuan, indicating NetEase's level of attention.
Image source: NetEase Financial Report
According to an article analyzed by the DataEye Research Institute, "Egg Party" has increased its bid and consumption by 5-10 times compared to the first half of the year in December 2023, as it competed for traffic on the app. After New Year's Day in 2024, "Egg Party" has performed outstandingly in terms of revenue, and marketing has played an indispensable role, especially during the New Year's Day period when marketing was "full of bullets" and billions of subsidies were introduced to stimulate sales.
After the financial report was released, NetEase experienced a sharp decline in both the US and Hong Kong stocks. According to investment analysts, it is largely due to NetEase's significant year-on-year increase in operating expenses in the fourth quarter, while gaming revenue increased by 9.6% year-on-year, far below analysts' expectations of 15%. Investors are concerned about whether Egg Party's marketing expenses will continue to maintain such a high growth in 2024, and whether these sales expenses can be converted into revenue.
At the performance meeting, Ding Lei pointed out that the New Year's Eve activity of "Egg Party" exceeded 40 million, "indicating that the market expenses we spent have received positive and positive effects." However, when analysts asked about the current user structure of "Egg Party", Ding Lei did not answer directly, only stating that UCG games are very difficult to succeed. Ding Lei also stated that "Egg Party" is exploring overseas markets and is still in the process of validating its ideas. The market still needs to wait for its results to show.
As a gaming company with a volume exceeding 100 billion yuan, the accumulation and growth of NetEase's gaming business have brought massive attention and profits. However, how to balance making money and social responsibility will be the most important issue that Ding Lei and NetEase need to consider at present.