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2 Chinese Dot-Com Laggards Have a Lot to Prove This Week

Art from one of NetEase's graphical games.

There doesn't seem to be a lot of joy these days in the dwindling camps of those who believe in NetEase (NASDAQ: NTES) and Vipshop Holdings (NYSE: VIPS) . The former dot-com darlings have fallen sharply in recent months, faring worse than the other Chinese growth stocks that have also been taking a beating given the one-two-three punch of trade tariff concerns, slowing economic growth, and the tightening of China's regulatory climate.

NetEase is trading 44% below the all-time highs it set late last year, and investors there are the lucky ones. Vipshop shareholders have seen their stock surrender 74% of its value since topping out in February. The market has been steering clear of China's former dot-com darlings lately, but NetEase and Vipshop have a shot at proving naysayers wrong this week. Both out-of-favor companies report fresh financial results after Wednesday's market close.

Art from one of NetEase's graphical games.

Art from a NetEase game. Image source: NetEase.

NetEase tries to get back into the game

It's easy to be optimistic about NetEase if you stop at the top line. Analysts see revenue surging 33% to $2.39 billion for the third quarter, its biggest percentage revenue gain in a year. The problem here is at the other end of the income statement, where investors are bracing for NetEase's fifth consecutive period of declining earnings .

Chinese regulators have nixed the approval of new video-game titles, and there has been a slowdown of online releases since March. That freeze isn't expected to thaw until at least early next year.

There was hope that Diablo Immortal -- the mobile game being co-developed by NetEase -- would breathe new life into the stock as a global online-gaming powerhouse in the near term, but the initial reaction by the gaming community has been unkind .

Margins are getting squeezed as NetEase throws money at nascent opportunities, including e-commerce, where its Kaola and Yanxuan businesses are driving top-line gains. It announced on Monday that it has completed the financing of $600 million for its cloud-based music service, but that's yet another venture that will be a drag on its near-term profitability.

Vipshop needs to get back into the VIP room

Contracting margins are also weighing on Vipshop. Wall Street pros see another period of revenue growth in this week's financial report -- up 14% to $2.52 billion -- but it would be its ninth straight quarter of decelerating top-line growth. Things only get uglier on the bottom line, where -- as with NetEase -- the investing community is expecting earnings to fall sharply from last year's third quarter.

The online discounter of brand-name apparel has different factors gnawing away at its profitability than NetEase does. The competitive climate for deep discounters remains fierce in China. Vipshop has had to subsidize fulfillment and invest in delivery solutions to woo shoppers, and profits have been contracting for more than a year as a result of the aggressive promotional activity.

NetEase and Vipshop have been beaten down to the point where even an OK report by either party can spark a stock bounce in relief. But they have to do more than that. NetEase and Vipshop need to get earnings growing again, and in Vipshop's case, it obviously wouldn't hurt if revenue starts accelerating again.

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NetEase. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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