Chinese stocks have seen a strong rally since September-end, with the Hang Seng China Enterprises Index increasing by ~28% in the past month.
NetEase, Inc. (NTES) is an undervalued foreign stock with a forward P/E ratio of 12.03x and an average upside potential of 29.04%.
Wall Street analysts expect NTES's long-term growth to be supported by its strong brand, user loyalty, and customer retention in the gaming industry.
The company's collaboration with Blizzard and AI integration in game development are expected to drive future growth and success.
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Chinese stocks have seen a strong rally since September-end as numerous supportive measures have reignited the investors’ confidence. The Hang Seng China Enterprises Index, which includes Chinese stocks listed in Hong Kong, saw an increase of ~28% in the past month. As a result, Invesco’s chief investment officer stated that this rally resulted in some stocks becoming overvalued. Elsewhere, Germany continues to face its struggles, with expectations that its economy will contract by 0.2% in 2024. However, the German government expects that the economy should return to growth in 2025, with the GDP anticipated to rise by 1.1%, slightly up from the previous forecast of 1.0%, reported Euronews. By 2026, growth should reach 1.6% as a result of private consumption and stabilizing inflation.
Regarding the Japanese economy, after a two-day meeting that ended on 20 September, the BOJ maintained the overnight call rate target at 0.25%.
Chinese and Japanese Economy- The Road Ahead
Fortune reported that the stimulus measures announced by Beijing consisted of rate cuts, freeing-up of cash at banks, robust liquidity support for stocks, and a pledge to end the long-term fall in property prices. The surge seen in Chinese equities in the recent past reasserted their influence on broader emerging-market gauges and weighed over the performance of fund managers running underweight positions.
Experts opine that the durability of such a rebound should influence the year-end performance of index-tracking funds. This will also have direct implications for nations having trading and investment links with the Chinese economy. Recently, The World Bank announced that China’s economic growth is expected to further slow in 2025 despite the stimulus measures. The World Bank projects that China’s growth will decline to 4.3% in 2025, down from an expected 4.8% in 2024. However, Mint reported that the recent surge in Chinese stock prices might demonstrate anticipations of increased inflation. This will raise nominal profits and the expectation of stronger corporate and economy-wide fundamentals. Therefore, experts are now more confident that China might turn its economy around and report much stronger growth in the last quarter and 2025.
While the market experts appear to be optimistic about Chinese equities, they should know that the Japanese economy is on a strong footing. Russell Investments believes that consumer spending stands at healthy levels and corporate earnings should continue to grow. While the investment firm expects that BoJ will remain cautious when considering future rate increases, it highlighted that capital expenditure intentions from businesses are strong.
Chinese Stimulus Measures to Help Foreign Economies
Mint also reported that the positive spillovers to the global economy will be greater if fueled by healthier Chinese economic fundamentals rather than just increased nominal prices. Talking about the developed economies, Australia and South Korea are expected to benefit the most, especially if there is even a partial recovery in the Chinese real-estate sector. This is expected to fuel demand for Australian iron ore, along with other raw materials.
South Korea, which has been tagged as a home to key suppliers in Chinese regional and global value chains, should witness increased demand for its industrial exports. If China’s willingness to spend increases, countries producing luxury products or attracting Chinese tourists, like France and Italy, are expected to benefit significantly over the upcoming months and around the next Chinese New Year in January.
Our Methodology
To list the 7 Most Undervalued Foreign Stocks to Buy According to Analysts, we used a Finviz screener to screen for ex-US companies. Next, we narrowed the list by choosing the stocks that are trading lower than the forward earnings multiple of 23.52x (since the broader market trades at ~23.52x, as per WSJ). Finally, we ranked the chosen ones according to their potential upside, as of 10 October. We also mentioned the hedge fund sentiments around each stock, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Two gamers enjoying an immersive experience playing together online via their gaming console.
NetEase, Inc. (NASDAQ:NTES) operates as a leading internet technology company offering online services such as content, community, communication, and commerce.
Wall Street analysts expect that NetEase, Inc. (NASDAQ:NTES)’s long-term growth trajectory is expected to be supported by strong brand, user loyalty, and customer retention. In the recent earnings call, the company highlighted the success of its games, which includes Once Human and Naraka: Bladepoint Mobile, and their expansion throughout genres and platforms. Also, AI integration in game development resulted in the 200% YoY growth in AI-driven subscription services.
Wall Street expects that ongoing collaboration with Blizzard should yield future cooperation. NetEase, Inc. (NASDAQ:NTES) remains optimistic regarding the upcoming launches of Where Winds Meet and Marvel Rivals. The company continues to explore different genres in a bid to develop games suitable for the global market. NetEase, Inc. (NASDAQ:NTES) remains well-positioned for continued growth with a strong emphasis on AI technology and a diverse gaming portfolio. Moving forward, the development of new titles should help achieve future successes.
The robust R&D and operating capabilities built over the past 2 decades led to the formidable games portfolio of newer innovative hits, diversifying its offerings. The gross profit margin for games and related value-added services for Q2 2024 came in at 70.0% as compared to 69.5% and 67.4% for the preceding quarter and the same quarter of 2023, respectively. The QoQ and YoY increases were primarily because of changes in the product mix.
As per Wall Street analysts, the shares of NetEase, Inc. (NASDAQ:NTES) have an average price target of $110.18. Polen Capital, an investment management company, released its first quarter 2024 investor letter. Here is what the fund said:
“NetEase, Inc. (NASDAQ:NTES) is one of the top players in China’s video game industry and saw decent revenue growth in 2023, particularly in its games division, with profit growth close to 20%. The stock also continues to recover after gaming restrictions announced last quarter in China were not nearly as bad as first feared.”
Overall NTES ranks 2nd on our list of the undervalued foreign stocks to buy according to analysts. While we acknowledge the potential of NTES as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than NTES but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
