NetEase Cloud Music (SEHK:9899) has renewed and expanded its multi year licensing agreement with Warner Music Group. The deal broadens cooperation into marketing, talent promotion and multimedia content for Chinese users and international artists.
See our latest analysis for NetEase Cloud Music.
Against this backdrop, NetEase Cloud Music’s recent licensing renewal with Warner Music Group comes after a mixed stretch in the market. The stock has shown a 9.92% 1 month share price gain but a year to date share price decline of 38.30% and a 1 year total shareholder return decline of 57.74%. The 3 year total shareholder return is up 54.96%, suggesting earlier gains have lost momentum more recently.
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Bulls see the Warner renewal as fresh fuel for NetEase Cloud Music, while bears see a rebound story hurt by recent share price declines and only modest revenue growth. Which side do the current valuation signals lean toward?
Price-to-Earnings of 7.7x: Is it justified?
On current numbers, NetEase Cloud Music is trading on a P/E of 7.7x, which sits below both its peers and the wider Hong Kong Entertainment industry.
The P/E ratio compares the company’s share price with its earnings per share, so a lower P/E can indicate that the market is assigning a lower price to each unit of profit. For a business like NetEase Cloud Music, which operates online music and social entertainment platforms and reports earnings with a 35.4% net profit margin, that gap between price and profits stands out.
Against similar stocks on an average P/E of 11.7x and the Hong Kong Entertainment industry on 9.8x, NetEase Cloud Music’s 7.7x looks materially cheaper. The ratio also sits below an estimated fair P/E of 8.9x. This indicates a level the market could potentially move toward if sentiment and earnings expectations align more closely with that fair ratio.
Explore the SWS fair ratio for NetEase Cloud Music
Result: Price-to-Earnings of 7.7x (UNDERVALUED)
However, NetEase Cloud Music still carries risks, including modest 7.8% annual revenue growth and slightly declining net income growth of 0.2%, which could restrain sentiment.
Find out about the key risks to this NetEase Cloud Music narrative.
Another view: NetEase Cloud Music through a DCF lens
While the P/E of 7.7x makes NetEase Cloud Music look cheap against peers, the SWS DCF model goes further, suggesting the stock trades around 63% below its estimated future cash flow value at HK$314.51 versus the current HK$116.3. That is a large gap, but does it reflect opportunity or risk if forecasts do not play out?
Look into how the SWS DCF model arrives at its fair value.
Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out NetEase Cloud Music for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 236 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.
Next Steps
With mixed signals around NetEase Cloud Music, it makes sense to move quickly and look through the numbers yourself before sentiment shifts again. Weigh the upside against the concerns by reviewing the 3 key rewards and 1 important warning sign
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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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