Gaming Business Supports Again, NetEase Q1 Revenue and Profit Exceed Expectations

On May 21, NetEase released its performance for the first quarter of 2026, with core financial indicators across the board exceeding market expectations, maintaining steady growth in the game business and further expanding profitability.

Driven by the financial report, the U.S. stock price which had previously fallen by more than 5% quickly narrowed its losses before the market opened. As of press time, the loss was narrowed to 1.5%.

Revenue and Profits Fully Exceed Expectations

In the first quarter, NetEase achieved a total revenue of 30.59 billion yuan, with market expectations at 29.51 billion yuan; adjusted net earnings per ADS from ongoing operations were 17.46 yuan, far higher than the estimated 15.47 yuan.

In terms of profits, the net profit attributable to the company's shareholders was 10.7 billion yuan, a year-on-year increase of 3.6%, and a sequential increase of 71.2%. Gross profit reached 21.22 billion yuan (estimated at 19.11 billion yuan), a year-on-year increase of 14.8%, and the gross margin increased from 64.1% last year to 69.4%. This was mainly due to a year-on-year decrease in operating costs of 9.4% in this quarter, and the compression of platform revenue sharing, which positively affected the gross margin.

Games Remain the Absolute Core

As the foundation of the company, online game services, the net income for the first quarter was 25.71 billion yuan, higher than the market expectation of 24.71 billion yuan, with a year-on-year increase of 6.9%.

The business's gross profit was 19.23 billion yuan, far exceeding the estimated 17.17 billion yuan, indicating that the gross margin of the game business is significantly higher than the market expectation, reflecting the joint support of high-margin old games' long-term operations and new product contributions.

In terms of innovation and other businesses, the net income for the first quarter was 1.55 billion yuan, slightly below the expected 1.58 billion yuan. Youdao's net income was about 1.3 billion yuan ($195.4 million), a year-on-year increase of 3.8%; Cloud Music's net income was about 2 billion yuan ($287.2 million), a year-on-year increase of 6.6%. Overall, the growth rate of non-gaming divisions is moderate, but its impact on the group's overall expectations is limited.

Key Points for Attention Going Forward

• Whether the game division's gross margin exceeding expectations can continue in the second quarter mainly depends on the ARPU of top old games and the pace of volume increase for new products (including overseas);

• Growth rate of innovative businesses (Youdao, Cloud Music) continues to be moderate, contributing marginally to the group;

• The dual price difference between Hong Kong stocks and U.S. stocks, combined with the mean 12-month analyst target price of $149.75, there is a certain room for upward movement, but attention should be paid to the guidance from management on new product reserves, licenses, and overseas expansion in subsequent conference calls.