Episode Details

NetEase (NTES) Q2 2026 — Q2 2026 (quarter ended June 30, 2026): net revenues RMB 30.11bn (+7.94%), about 2.3% ahead of consensus, while adjusted earnings of $1.77 per ADS missed a $2.31 bar by 23.4%. Operating profit rose 33.42% to RMB 12.09bn. Results were furnished before the open on Thursday August 20; the shares fell 5.85% that session on 2.1x median volume and then rose 6.98% on Friday August 21 to close at $128.17, leaving the two sessions +0.72% together. The games segment sold RMB 2.22bn more and paid RMB 0.82bn LESS to deliver it, because self-developed titles displaced licensed ones. Gross profit therefore grew RMB 3.03bn - 137% of the revenue it grew on - and games gross margin went 70.22% to 76.13%, which Macquarie called a record. Group operating profit rose 33.42% on revenue of 7.94%. The entire 23% earnings shortfall happened below that line. THE CALL: BUY (3/5, THE OPERATING LINE HAD ITS BEST QUARTER IN YEARS AND EVERY BIT OF THE MISS SAT UNDERNEATH IT) — base-case value ~$149.31 vs ~$128.17 today. KEY METRICS: - THE COST LINE: games and related value-added services revenue rose 9.72% to RMB 25.02bn while the COST of that revenue FELL 12.05% in absolute renminbi, from RMB 6.79bn to RMB 5.97bn. Gross profit rose RMB 3.03bn on RMB 2.22bn of extra revenue, which is 137%. Games gross margin 70.22% to 76.13%, the highest of the three quarters shown; self-operated titles were 97.7% of the segment against 97.1%. Group operating margin 32.49% to 40.16% on operating expenses that rose just 1.52%. - WHERE THE MISS CAME FROM: other income and expenses swung RMB 4.05bn against the company, from RMB 1.59bn of income to RMB 2.46bn of expense, on RMB 2.02bn of fair-value declines and RMB 1.28bn of impairments - RMB 3.31bn against RMB 0.22bn a year ago, and every yuan of it added straight back as non-cash in the cash flow statement. The effective tax rate went 14.66% to 25.54%, worth RMB 1.05bn or RMB 1.58 an ADS, 43% of the whole distance to the bar. - THE BASIS, PROVEN: one ADS is five ordinary shares and NetEase reports in renminbi. Its non-GAAP excludes exactly ONE item, share-based compensation of RMB 0.77bn. The four 2025 quarters in renminbi sum to RMB 58.00 against a filed RMB 57.99 - one fen; the same four quarters in US dollars sum to $8.12 against a filed $8.29, 2.05% short, because each is translated at its own quarter-end rate. Net cash of RMB 167.5bn is $38.31 an ADS, 29.9% of the share price. What to watch: UP: contract liabilities stop shrinking while the margin holds, or the effective tax rate returns toward last year's 14.66% - worth RMB 1.05bn a quarter, and nothing at all to the operating line we value. DOWN: contract liabilities fell 5.93% across the half to RMB 19.30bn and operating cash flow fell 8.18% in the quarter while operating profit rose 33.42%; NetEase publishes no guidance of any kind, so there is nothing forward to check either against. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.