NTES Report After the Bell, Way To Play For A Rebound

by Dan May 18, 2011 3:39 pm • Commentary

NTES (45.95) a Chinese online game provider, who recently announced that they have 360 million registered email users, reports earnings tonight after the close.

-the implied move in the options market is ~6% vs the 8 qtr average move of ~4.5% (only 3 of the 8 have been more than 5%).

-analyst community is overwhelmingly positive on the name with 22 Buys, 6 Holds and 0 Sells.
-Stock is not expensive vs some of its mature Chinese Internet peers at only 5.5x estimated sales vs BIDU at 23x sales, SINA at 14x and CTRP at 10.5x…
-Analysts currently estimate eps and sales to grown at 26% and 15% respectively this year.
-stock is up 27% ytd, but down 16% from the recent all time highs made last month…..


Chinese Internet stocks are in bit of a bubble right now, 3 recent IPOs on the Nasdaq highlight the fact as RENN, FENG and NQ are all trading at or below their offering prices.

More importantly the more established names listed here in the states have gotten nailed since their all time highs late last month…..

Additionally the little Alipay/YHOO mishap hasn’t helped US investor sentiment towards the space.

Personally I couldn’t buy any of these stocks as investments until they were very washed out….but they can be great momentum trading vehicles…..the increased volatility of late is not a particularly comforting thing to me but when I look at name like NTES into earnings it leaves me to believe that there is a very good chance that it could realize its implied move……

Technically the chart appears to be at a bit of crossroads…..it has held a nice uptrend since this years lows back in January, but sitting on fairly important support…..feels like it has 40 or 50 written all over it after the print.  I would prefer to lean long as this is not one of the names that appears to have stretched valuation.

[caption id="attachment_1971" align="aligncenter" width="300" caption="1 yr NTES chart    Provided by Bloomberg"][/caption]


TRADE: LOW CONVICTION:  BUY JUNE 50/55 Call Spread for .75

-Buy June 50 call for 1.00 and

-Sell June 55 call at .25

Break-Even on June Expiration:

Upside: stock 50 and 50.75  lose up to .75 btwn 50.75 and 55 make 4.25, above 55 make 4.25

Downside: Below 50 lose .75 premium….

TRADE RATIONALE: if the company misses and or guides down the stock is clearly going back to 40, maybe lower….but because of the valuation discount to its peers, the stock could ramp back towards the highs on any good news….