Bernstein analyst Robin Zhu initiates coverage on NetEase Inc (NTES  ) with an Outperform rating with a price target of $120.

NetEase has grown consistently over the years, irrespective of regulatory intervention. NetEase is a dependable operator with a concrete runway for compound growth, with optionality from generative AI development and expansion overseas.

The company's legacy franchises remain strong, while its stable studios have supported 20-30 new game launches a year with a solid track record of building and managing game franchises domestically over multiple years.

NetEase has set up a dozen new overseas studios in the past 18 months, staffed with industry veterans with AAA game development experience.

The immediate launch slate includes the launch of Justice Mobile on June 30, plus the international launches of Harry Potter: Magic Awakened and Eggy Party in the second half of 2023. Naraka: Bladepoint Mobile and Where Winds Meet remains in development but are notable titles that could help to extend the recent launch cycle into 2024.

NetEase has achieved recognition in Japan, while its success with Naraka: Bladepoint represents an encouraging data point on the possibility of future console and PC success.

The analyst estimates the global video gaming TAM to be around $100 billion - $150 billion outside China, within which NetEase takes a 1% share.

He expects generative AI growth to represent a massive productivity boost for video game development, driving efficiency gains in game production and enabling richer gaming experiences - both in-game (e.g., AI-powered NPCs, user-generated content) and within broader fan ecosystems.

The analyst anticipates generative AI to streamline and accelerate the game development process and reduce costs and time associated with work streams such as art and 3D design and production.

In May, NetEase reported first-quarter FY23 revenue growth of 6.3% year-on-year to $3.65 billion, beating the consensus of $3.56 billion. Games and related value-added services revenues grew 7.6% Y/Y to $2.92 billion.

Non-GAAP EPADS of $1.69 beat the consensus of $1.25.

Price Action: NTES shares traded lower by 0.47% at $86.20 on the last check Monday.