Why Shares of NetEase Inc. Tumbled Today

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What happened

Shares of Chinese internet company NetEase Inc. (NASDAQ: NTES) slumped on Thursday following a mixed second quarter . While the bottom line topped analyst estimates, revenue growth wasn't quite up to par. The stock was down about 10.9% at 3:20 p.m. EDT.

So what

NetEase reported second-quarter revenue of $2.5 billion, up 21.7% year over year in local currency, but $20 million below the average analyst estimate. Online game services revenue rose just 6.7% to $1.5 billion, while e-commerce revenue jumped 75.2% to $660 million.

Non-GAAP earnings per ADS came in at $3.15, beating analyst expectations by $0.33. That translates to RMB20.87, down from RMB26.18 in the prior-year period. Cost of revenue surged 36% year over year, while operating expenses jumped 47%. Both grew much faster than revenue. The company blamed higher marketing expenses, research and development spending, and shipping and handling costs for the increase in operating expenses.

"Innovation and craftsmanship continue to serve as the cornerstone of each of our businesses," said NetEase CEO William Ding. "For more than two decades we have maintained these principles, propelling our relevancy and competitive edge. We believe these core values, our considerable R&D capabilities, and strong business acumen will continue to drive our future success."

Now what

NetEase's core online gaming business didn't grow very quickly in the second quarter. While the e-commerce business put up much more impressive growth, margins are extremely low. E-commerce gross margin was just 10.1%, hurt by sales discounts. The e-commerce business was the main revenue driver during the quarter, but it didn't help the bottom line.

The market didn't take kindly to revenue growing more slowly than expected. Including Thursday's drop, NetEase stock is now down about 35% year to date.

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Timothy Green 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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