NetEase posts profit growth and record-high margins in 2Q26; Goldman Sachs reiterates Buy and raises target prices

Overview

This report reviews NetEase's 2Q26 results and analyzes margin expansion, the resilience of existing games, the new-game pipeline, and earnings forecast revisions. Goldman Sachs views the company as a “non-AI” compounder with high margins and strong free cash flow generation. Although near-term billings growth faces pressure, this does not alter its view of solid profit growth or its Buy thesis.

Core views

NetEase delivered solid growth again in 2Q26: game sales rose 10% year over year and operating profit increased 29% year over year. Goldman Sachs believes this performance demonstrates the resilience of the gaming business and its ability to consistently translate growth into higher profits. Compared with an industry increasing AI investment and certain peers facing margin pressure, NetEase achieved record-high margins and free cash flow generation. The report states that the stock trades at approximately 12 times forward P/E on the basis cited in the main text, while 2026E operating profit is expected to grow 20% year over year, supporting its positioning as a “non-AI compounder.” Margin expansion is the report's foremost positive factor. Gaming margin reached a record high in 2Q26, driven by an improved revenue mix between PC and mobile games, lower payment fees on iOS and Android channels, and the migration of traffic and payments to NetEase's proprietary channels. Goldman Sachs believes these changes are structural improvements rather than one-quarter anomalies. Combined with improved operating efficiency, operating margin is expected to continue expanding in 2H26E, with operating profit growth potentially reaching the high teens year over year. The forecast table shows EBIT margin increasing from 35.0% in 2025 to 39.9% in 2026E, while EBITDA margin rises from 37.0% to 41.7% and 2026E EBITDA grows 19.0% year over year. The second major theme is the resilience of the mature game portfolio. Even without major new-game launches during the quarter, FWJ, Where Winds Meet, and Marvel Rivals continued to deliver solid growth. Eggy Party also recovered markedly during the summer period over the past two months following sustained live-operations innovation. Goldman Sachs believes these long-running IPs form the company's core revenue base and can cushion volatility in individual titles even when new-game contributions are limited. Deferred revenue excluding Youdao increased 15% year over year in 2Q26, also supporting subsequent revenue recognition. The report expects FWJ and Where Winds Meet to maintain strong growth, while Sea of Remnants contributes incremental revenue in 2026E. Near-term pressure stems mainly from billings growth and the product pipeline. Billings grew 3% year over year in 2Q26, only slightly above the 2% recorded in 1Q26. Entering 2H26, the comparison base is higher due to the strong performance of the FWJ PC game in the prior year. Billings following the launch of Sea of Remnants were below the previous expectations of both management and Goldman Sachs, while pipeline titles such as Ananta and Under the Fog still lack clear near-term launch schedules. Goldman Sachs therefore expects billings trends to face greater pressure in 2H26, but believes growth could reaccelerate in 2027 as new games are gradually released. The report also expects the sales and marketing expense ratio to rise in 3Q26E and 4Q26E due to new-game promotions and game anniversary events. Items below operating profit also weighed on 2Q26 net income, mainly including foreign-exchange losses, investment losses, and impairment charges. Goldman Sachs believes these factors may not recur every quarter, particularly because investment losses are highly correlated with NetEase's equity interests in Alibaba and PDD Holdings. The report accordingly reduced its 2026E net income forecast by 4% to incorporate investment losses, while leaving its 2027E—2028E net income forecasts broadly unchanged due to gross margin expansion and improved expense efficiency. The earnings forecast revisions reflect a view of “greater caution on revenue and greater resilience in margins.” Goldman Sachs adjusted its 2026E—2028E revenue forecasts by approximately -2% to 0%, mainly reflecting weaker-than-expected performance from Sea of Remnants and insufficient visibility into the new-game pipeline, partly offset by the strong performance of evergreen games. The new revenue forecasts are RMB 1188.489 hundred million, RMB 1260.620 hundred million, and RMB 1353.838 hundred million, respectively, compared with previous forecasts of RMB 1192.898 hundred million, RMB 1276.366 hundred million, and RMB 1374.665 hundred million. The corresponding revenue growth rates are 5.5%, 6.1%, and 7.4%. The new US-dollar EPS forecasts are 8.65, 10.32, and 11.20, respectively, compared with previous forecasts of 8.95, 10.28, and 11.11. On valuation, Goldman Sachs maintains an 18 times 2026E target P/E multiple for the mobile and PC gaming businesses and continues to use a sum-of-the-parts valuation methodology. Based on the forecast revisions, the 12-month target prices for NTES and 9999.HK were modestly raised from US$167 and HK$262 to US$168 and HK$263, respectively, implying potential upside of 32.0% and 36.0% versus the report's stated current prices of US$127.25 and HK$193.40. Goldman Sachs therefore reiterates its Buy rating and Conviction List designation.

Analysis framework

Goldman Sachs first assesses the quality of business growth using 2Q26 game sales, operating profit, billings, and deferred revenue, and then analyzes the effects of the PC and mobile game mix, channel fee rates, and migration to proprietary channels on gross margin. It subsequently evaluates the performance of each existing game, the results of new-game launches, and the 2026—2027 pipeline schedule. On this basis, the institution distinguishes operating profit from below-operating-profit volatility such as investment losses, revises its 2026—2028 revenue and profit forecasts, and finally applies target P/E multiples to the mobile and PC gaming businesses within a sum-of-the-parts valuation to derive 12-month target prices.

Methodology notes

• Valuation MethodSOTP Valuation

  12-month SOTP valuation

  The report values NetEase's principal businesses separately and then aggregates them to derive target prices for NTES and 9999.HK; the target prices in this report are US$168 and HK$263, respectively.

• Valuation MethodP/E and PEG Valuation

  18 times 2026E P/E for the mobile and PC gaming businesses

  Based on projected 2026 earnings, Goldman Sachs maintains an 18 times target P/E multiple for the mobile and PC gaming businesses and incorporates it into the sum-of-the-parts valuation.

• Industry Analysis FrameworkVolume-price decomposition

  Analysis of game billings, revenue, and contribution by product

  The report separately examines game billings growth, accounting revenue, deferred revenue, and contributions from different games to assess near-term monetization trends and future revenue-recognition capacity.

• Quantitative/Factor/Portfolio TheoryMulti-factor model

  GS Factor Profile

  This framework measures growth using expected sales, EBITDA, and EPS growth; measures financial returns using ROE, ROCE, and CROCI; and combines valuation metrics such as P/E, P/B, and EV/EBITDA to calculate standardized percentiles, providing context for comparisons between the stock, the market, and industry peers.

• Event-Driven Strategies and Behavioral Finance

  M&A Rank acquisition-likelihood ranking

  Goldman Sachs classifies potential acquisition probability into levels 1 through 3 using qualitative and quantitative factors. NetEase has an M&A Rank of 3, corresponding to a low probability of 0%—15%; therefore, M&A factors are not incorporated into the report's target prices.

Asset mapping & comparison

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

• NetEase Inc. ADR (NTES)

  NetEase's US-listed ADR, directly reflecting the report's assessment of the company's gaming business, earnings forecasts, and sum-of-the-parts valuation.

  Strengths

  Solid existing game IP, record-high gaming margin, strong free cash flow generation, and continued improvements in channel mix and operating efficiency.

  Weaknesses

  2Q26 billings grew only 3% year over year, the comparison base is higher in 2H26, and near-term launch visibility for the new-game pipeline is insufficient.

  Comparison

  Goldman Sachs emphasizes that its margins and free cash flow performance are superior to those of certain industry peers facing heavy AI spending and margin pressure.

  Risks

  Weakening existing games, slower-than-expected monetization of new games, intensifying competition, and rising content and marketing costs.

• NetEase Inc. H-shares (9999.HK)

  NetEase's Hong Kong-listed shares represent the same company fundamentals as the ADR and use the same sum-of-the-parts valuation logic.

  Strengths

  Benefits from a mature game portfolio, structural gross margin expansion, and improved expense efficiency.

  Weaknesses

  Near-term billings growth is slow, Sea of Remnants performed below expectations, and launch dates for other pipeline products remain unclear.

  Comparison

  The report does not differentiate between the operating fundamentals of the ADR and H-shares, providing only currency-specific target prices and potential upside for each.

  Risks

  The same company-level risks, including game performance, monetization progress, industry competition, and rising costs.

Key data

• 2Q26 game sales growth10% year over yearDemonstrates that the gaming business maintained solid growth.
• 2Q26 operating profit growth29% year over yearSignificantly outpaced game sales growth, reflecting margin improvement.
• 2Q26 game billings growth3% year over year1Q26 recorded 2% year-over-year growth, and the second half will face a higher comparison base.
• 2Q26 deferred revenue15% year over yearDeferred revenue growth excluding Youdao.
• 2026E operating profit growth20% year over yearThe annual growth expectation used in the report's main text.
• 2H26E operating profit growthHigh teens year over yearSupported by structural gross margin improvement and greater operating efficiency.
• 2026E—2028E revenue forecastsRMB 1188.489 hundred million, RMB 1260.620 hundred million, RMB 1353.838 hundred millionThe previous forecasts were RMB 1192.898 hundred million, RMB 1276.366 hundred million, and RMB 1374.665 hundred million, respectively.
• 2026E—2028E revenue growth5.5%, 6.1%, 7.4%Corresponding to the new annual revenue forecasts.
• 2026E net income forecast revision-4%Primarily incorporates the impact of 2Q26 investment losses.
• 2026E—2028E US-dollar EPS forecasts8.65, 10.32, 11.20The previous forecasts were 8.95, 10.28, and 11.11, respectively.
• 2026E EBITDARMB 495.999 hundred millionUp 19.0% year over year, with EBITDA margin expected to reach 41.7%.
• 2026E EBIT margin39.9%Compared with 35.0% in 2025.
• Forward P/E in the main text12 timesThe stock's current trading valuation described in the report's main text; the forecast table lists 2026E P/E at 14.5 times.
• 2026E free cash flow yield7.8%Based on the forecast table.
• Target valuation for mobile and PC gaming18 times 2026E P/EThe valuation multiple remains unchanged in this report.
• 12-month target pricesNTES: US$168; 9999.HK: HK$263Previously US$167 and HK$262, respectively.
• Current prices and potential upsideNTES: US$127.25, 32.0%; 9999.HK: HK$193.40, 36.0%The prices listed on the report's front page and the corresponding upside to the target prices.
• Market capitalization and enterprise valueUS$80.8bn; US$54.8bnMarket capitalization and enterprise value listed on the report's front page.

Impact & implications

Goldman Sachs believes NetEase's core transformation is not dependent on AI investment or a single blockbuster title; instead, the resilience of its game portfolio, improved channel mix, and expense efficiency are jointly driving higher margins and free cash flow. Insufficient new-game supply and a high billings comparison base may suppress revenue performance in 2H26, but if structural margin improvements persist, profit growth could continue to outpace revenue growth. The gradual release of new games could then drive reacceleration in 2027.

Risks

• The performance of existing games may be weaker than expected.
• The commercialization ramp-up of new games may be slower than expected.
• Competition in gaming, e-commerce, education, and other business areas may intensify further.
• Music content costs and advertising expenses associated with the online education business may increase.

What to watch

• Monitor game billings growth in 2H26 against a higher comparison base.
• Monitor subsequent billings from Sea of Remnants and clear launch dates for pipeline products such as Ananta and Under the Fog.
• Monitor whether existing games such as FWJ, Where Winds Meet, Marvel Rivals, and Eggy Party can sustain growth or recovery.
• Monitor whether the PC and mobile game mix, lower mobile-channel fee rates, and migration to proprietary channels can continue driving gross margin and operating margin expansion.
• Monitor the increase in sales and marketing expense ratios in 3Q26E and 4Q26E arising from new-game promotions and anniversary events.
• Monitor whether investment gains and losses related to holdings in Alibaba and PDD Holdings continue to affect net income.