NetEase's quarterly report falls short of expectations, but actual performance is better?

Despite weak Q4 earnings that fell below market expectations, JPMorgan believes the company’s actual operational performance is much better than what the financial figures suggest.

NetEase announced its Q4 2025 financial results, with revenue up only 3% year-over-year and net profit down 27% YoY, both falling approximately 4% and 23% short of Bloomberg consensus estimates. This directly pressured Hong Kong stock prices pre-market, with a 4% decline at open.

However, JPMorgan’s research report notes that the strong cash flow from new games like “Yan Yun Shili Sheng” is reflected in contract liabilities, and non-recurring losses have masked the excellent core operating profit performance.

Additionally, with major new titles such as “Sea of Oblivion” and “Infinite” launching, it is expected to drive a 13% compound annual growth rate in gaming revenue for 2026-2027. JPMorgan maintains an “Overweight” rating on NetEase, with a target price of HKD 295 ($190), based on a 13x forecasted P/E ratio for 2026, which is attractive.

Real cash flow far exceeds reported revenue

The research report points out that market disappointment with NetEase’s revenue mainly stems from Q4 online game revenue increasing only 4% YoY and declining 7% QoQ. This is easily interpreted as sluggish growth.

For example, rankings and revenue for “Egg Party” and “Identity V” have declined, but this is partly due to the seasonal slowdown during summer.

Furthermore, JPMorgan emphasizes that the money has already been received, just not yet recognized as revenue. The key indicator “contract liabilities” (similar to deferred revenue—player prepayments not yet recognized as income) shows surprisingly strong performance.

Q4 2025 saw a 34% YoY surge, far above the 25% in Q3, and even achieved a 5% QoQ growth in Q4, typically a slow season. This contrasts sharply with declines of 6% and 2% in Q4 2023 and 2024, respectively.

The driving force behind this is the robust cash flow from “Yan Yun Shili Sheng” in both domestic and international markets. JPM estimates that NetEase’s actual cash flow in Q4 increased by 10% YoY.

Considering the high base effect from Activision Blizzard China’s revenue in the same period of 2024, this double-digit growth is quite impressive.

“Profit plunge” illusion, investment losses as scapegoat

Net profit down 27% YoY, 23% below Bloomberg consensus, is indeed alarming. But this does not mean NetEase’s business is failing; it’s due to investment paper gains and losses.

JPMorgan points out that in Q4, NetEase recognized RMB 2.2 billion in equity investment and exchange losses (including RMB 1.7 billion in investment losses), whereas the same period last year saw RMB 1 billion in gains. This swing directly lowered net profit.

Removing these non-recurring items, NetEase’s core profitability remains solid:

• Operating profit actually grew 5% YoY.
• Operating margin increased by 0.6 percentage points YoY, and surged 1.8 percentage points QoQ.
• Sales and marketing expense ratio decreased by 1.6 percentage points QoQ, indicating highly rational and efficient user acquisition spending.

In simple terms, the company’s main business is not deteriorating; it has become more profitable due to more reasonable cost control.

13x P/E is extremely cheap; two major new titles scheduled for 2026

JPMorgan believes the market’s concerns about NetEase are overdone. Currently, the 2026 P/E ratio is only 13x, lower than major A-share gaming companies, offering a high margin of safety.

At the same time, analysts are increasingly optimistic about NetEase’s game pipeline for 2026.

Analysts expect “Infinite” to launch in Q3 2026, potentially becoming NetEase’s highest-revenue game, with estimated first-year revenue of RMB 12 billion, about half of “Genshin Impact”’s revenue in the same period.

Another highly anticipated title, “Sea of Oblivion” (an ocean adventure RPG), is expected to launch in the first half of 2026, with annual revenue estimated at RMB 5 billion.

Moreover, NetEase has fully integrated artificial intelligence into its game development cycle. From art design to programming, animation, and quality assurance, this enhances high output and scalable production capabilities, enabling the smooth rollout of dynamic AI-native features in multiple flagship games.

Most importantly, NetEase may be included in the Hong Kong Stock Connect in 2026. JPMorgan believes that by 2026, NetEase could qualify for inclusion, which would bring southbound capital liquidity support and further uplift valuation.

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