Goldman Sachs has issued a research report maintaining a "Buy" rating on NetEase (09999, NTES.US), with a 12-month price target of US$168/HK$263 based on a sum-of-the-parts valuation methodology. The bank notes that following the underwhelming performance of Fragments of the Forgotten Sea after its launch, the ongoing market debate surrounding the company centers on three key questions: whether the weak performance of the title is an isolated product issue or a potential indicator of broader problems with the company's development strategy; how successful the upcoming Infinity Nikki, scheduled for a mid-January 2027 launch, could be and whether it can drive revenue growth and overseas narrative expansion for 2027; and what level of sustained mid-to-long-term growth the company can achieve under its strategy of concentrating on a smaller number of new game titles.
Goldman Sachs outlines its primary views as follows:
1. The bank believes that the performance of Fragments of the Forgotten Sea is more attributable to the product itself, as its relatively high comprehension threshold has led to a mismatch in new player onboarding and early-game pacing. In other words, mass-market users may struggle to grasp the game's core appeal in the early stages and may churn before achieving sufficient gameplay proficiency.
2. After a relatively muted slate of new games in 2026, the bank has assessed the 2027 pipeline of major titles, primarily Infinity Nikki and Under the Mist, and believes the pipeline will boost company revenue following the lackluster 2026 period. If executed properly, the bank expects incremental revenue contribution of over 10% from next year's pipeline, comparable to the levels seen in 2023 and 2025. More importantly, the overseas revenue and popularity gains from Infinity Nikki have the potential to change the narrative for the stock and drive a valuation re-rating, given that the current forward P/E multiple stands at 12 times versus over 20 times for Japanese peers. Historically, the stock's valuation multiple over the past five years has shown a stronger correlation with cash flow trends, particularly when growth exceeds 10%.
3. From a long-term perspective, while annual product cycles vary and can sometimes be volatile, NetEase's established portfolio of mature game IP should provide a solid foundation for the revenue base. Meanwhile, the widespread adoption of AI tools should help accelerate the pace of content release and upgrades, extend the lifecycle of these IPs, and translate into a mid-single-digit year-over-year growth baseline at the group level. Recently, Blizzard announced its new game release plan through 2030, including Diablo V, a new StarCraft title, and World of Warcraft: Infinite. Given NetEase's exclusive licensing partnerships in China, this is expected to bring additional revenue streams. With a limited number of new game releases and constrained capital expenditure, the bank also sees ample room for the company to enhance shareholder returns through buybacks and dividends. Based on a 40% payout ratio, the current expected shareholder return yield for 2026 is above 3%.
The risk-reward profile is attractive. The 2027 game pipeline is key to the company's recovery of double-digit year-over-year revenue growth, a significant increase in overseas market exposure, and diversification across game genres. The bank currently sets a baseline forecast of RMB 6 billion in annual gross revenue for Infinity Nikki and expects sequential acceleration in gross revenue growth following a potential slowdown in Q3 2026 due to high comparison bases and a lackluster contribution from new titles. The bank believes that market expectations for Infinity Nikki have already been lowered, partly due to the performance of Fragments of the Forgotten Sea and the absence of large-scale testing prior to official launch. However, given that the game targets a broad player base with a global cross-platform release covering PC, console, and mobile, there is room for its performance to exceed current expectations.
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