Goldman Sachs reiterates Buy on NetEase: non-AI compound growth alongside 2H26 game catalysts

Overview

This report covers NetEase Inc., with Goldman Sachs reiterating its Buy rating. The report argues that amid market concerns that AI may disrupt software and application companies, while Chinese internet peers are increasing AI investment and pressuring margins, NetEase looks more like a non-AI compound growth name with cash flow, margin expansion, and shareholder return capabilities. The company’s share price showed relative resilience after 1Q26 results, and the report expects sales growth and operating profit growth to accelerate in 2H26.

Core views

The core views are as follows: first, through channel cost optimization, organizational streamlining, and integrating AI into R&D workflows, NetEase is expected to achieve over 20% YoY operating profit growth in 2026; second, the game pipeline including Sea of Remnants, Ananta, and Blood Message should help demonstrate NetEase’s R&D capabilities across genres and global markets; third, potential inclusion in Southbound Connect after completing its Hong Kong dual primary listing will be a near-term funding catalyst; fourth, the current 11-12x forward P/E still has room for re-rating, especially if revenue growth improves and earnings are revised up.

Analysis framework

The report uses earnings forecast revisions, estimates of game gross billings and revenue contribution, peer valuation comparisons, and an SOTP valuation framework. Goldman Sachs keeps its 2026E-2028E revenue forecasts unchanged, cuts its 2026E net profit forecast by 4% mainly due to investment losses, and slightly raises its 2027E-2028E net profit forecasts by 1% to reflect improved operating efficiency.

Methodology notes

• Valuation methodsSOTP sum-of-the-parts valuation

  Assign valuation multiples by business segment and sum them to derive the target price

  The report maintains an 18x target multiple for mobile and PC games, and based on this derives 12-month target prices of US$169 for NTES.US and HK$264 for 9999.HK.

• Relative valuationForward P/E and peer comparison

  Compare gaming and internet peers by P/E level, revenue growth, and earnings revisions

  The report notes that NetEase currently trades at about 11-12x forward P/E, and if revenue growth improves to 10%-15% and earnings continue to be revised upward, the valuation multiple could expand to above 15x.

• Factor analysisGS Factor Profile

  Assess stock characteristics from growth, financial returns, valuation multiples, and composite score

  Using Goldman Sachs forecasts, this framework compares the stock on growth, financial returns such as ROE/ROCE/CROCI, and valuation metrics such as P/E, P/B, and EV/EBITDA on a percentile basis.

• Event catalystTracking catalysts from new games and Southbound Connect

  Track product launches, overseas releases, Southbound Connect inclusion, and earnings revisions

  The report views the launch of Sea of Remnants, the follow-on pipeline of Ananta and Blood Message in 2027 and beyond, and potential inclusion in Southbound Connect no later than September 2026 as important catalysts.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• NTES.US

  Primary covered target, NetEase Inc. ADR

  Strengths

  Buy rating, target price increase, stable FCF and shareholder returns, and a game pipeline with global potential.

  Weaknesses

  Net profit may be affected in the short term by investment losses, and valuation upside depends on revenue acceleration and earnings upgrades.

  Comparison

  The report compares NetEase’s valuation with Tencent and global gaming peers, and believes NetEase still trades at a discount.

  Risks

  Weakening performance of legacy games, slower-than-expected monetization of new games, intensifying gaming competition, and changes in future game formats.

• 9999.HK

  NetEase Inc. Hong Kong-listed shares, with potential Southbound Connect catalyst

  Strengths

  After completing the Hong Kong dual primary listing, the report expects possible inclusion in Southbound Connect no later than September 2026.

  Weaknesses

  Near-term trading catalysts depend on the timing of inclusion and southbound investor preferences.

  Comparison

  Shares the same fundamentals and SOTP valuation logic as the ADR, but Hong Kong liquidity and southbound capital factors may create differences.

  Risks

  Timing of Southbound Connect inclusion, market risk appetite, and overall valuation volatility in China’s internet sector.

Key data

• Rating and target priceBuy; US$169 / HK$264The previous target price was US$166 / HK$260, representing a slight increase this time.
• Current priceUS$123.71 / HK$187.50From the company-specific disclosure information page in the report.
• Expected upsideapproximately 36.6% / 40.8%Roughly calculated based on the target price relative to the current price disclosed in the report.
• Market cap and enterprise valueMarket cap US$78.5bn；Enterprise value US$51.8bnFrom the Key Data disclosure on the front page.
• 2026E operating profit growth20%+ YoYDriven by gross margin tailwinds, organizational and labor-efficiency optimization, and AI integration into R&D workflows.
• 2026E FCF yieldapproximately 9%Reflecting stable cash flow and shareholder return capability.
• Sea of Remnants first-12-month gross billings estimateRMB5.8bn+The report expects this new game to drive double-digit growth in game gross billings and revenue in 2H26.
• Next 12-month sales contribution5%+ incremental sales contributionDerived from estimated contributions from Sea of Remnants across domestic and overseas, multi-platform releases.
• Earnings forecast revisions2026E net profit cut by 4%; 2027E-2028E net profit raised by 1%2026E is dragged by investment losses, while later years are supported by improved operating efficiency.
• Current valuation11-12x forward P/EThe report believes there is re-rating potential amid accelerating sales and operating profit.

Impact & implications

For investors, the report positions NetEase as a gaming asset within China’s internet sector that combines defensiveness, cash flow, and visible catalysts. If new game gross billings deliver, Southbound Connect inclusion materializes, and earnings upgrades continue, the valuation discount may narrow; however, if legacy games underperform or new game monetization is slower than expected, the target price thesis will come under pressure.

Risks

• Legacy games may perform weaker than expected.
• Commercialization ramp-up of new games may be slower than expected.
• Competition may intensify across gaming, e-commerce, education, and other business areas.
• Rising music content costs, as well as increased advertising expenses related to the online education business.
• Industry-wide changes in future game formats.
• Investment losses, especially volatility related to the PDD position, may weigh on net profit in certain periods.

What to watch

• The July 9, 2026 domestic PC launch of Sea of Remnants, subsequent mobile launch, and the pace of its overseas release in 2026.
• Whether Sea of Remnants can deliver RMB5.8bn+ in gross billings and 5%+ sales contribution in its first 12 months.
• Ananta’s development progress and launch timing around 2027.
• The performance of Blood Message as it enters the AAA single-player premium game market in 2027 or later.
• Whether NetEase will be included in Southbound Connect no later than September 2026 after completing its Hong Kong dual primary listing.
• The ongoing contribution of organizational optimization, employee headcount trends, and AI integration into R&D workflows to operating margin.
• Whether revenue growth can improve to 10%-15%, and whether market earnings forecasts continue to be revised upward.