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NetEase's (NASDAQ:NTES) earnings growth rate lags the 16% CAGR delivered to shareholders

While NetEase, Inc. (NASDAQ:NTES) shareholders are probably generally happy, the stock hasn't had particularly good run recently, with the share price falling 19% in the last quarter. But don't let that distract from the very nice return generated over three years. To wit, the share price did better than an index fund, climbing 49% during that period.

In light of the stock dropping 6.2% in the past week, we want to investigate the longer term story, and see if fundamentals have been the driver of the company's positive three-year return.

View our latest analysis for NetEase

To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it's a weighing machine. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

NetEase was able to grow its EPS at 17% per year over three years, sending the share price higher. The average annual share price increase of 14% is actually lower than the EPS growth. So it seems investors have become more cautious about the company, over time.

You can see below how EPS has changed over time (discover the exact values by clicking on the image).

earnings-per-share-growth
earnings-per-share-growth

We know that NetEase has improved its bottom line lately, but is it going to grow revenue? If you're interested, you could check this free report showing consensus revenue forecasts.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, NetEase's TSR for the last 3 years was 57%, which exceeds the share price return mentioned earlier. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

While it's certainly disappointing to see that NetEase shares lost 3.3% throughout the year, that wasn't as bad as the market loss of 22%. Of course, the long term returns are far more important and the good news is that over five years, the stock has returned 10% for each year. In the best case scenario the last year is just a temporary blip on the journey to a brighter future. Before forming an opinion on NetEase you might want to consider these 3 valuation metrics.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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