The9 Limited (NASDAQ:NCTY), is a USD$65.68M small-cap, which operates in the software industry based in China. The past two decades have experienced unprecedented changes in technology, and the next decade looks equally drastic. Tech analysts are forecasting for the entire software tech industry, a fairly unexciting growth rate of 8.28% in the upcoming year , and a single-digit 4.97% growth over the next couple of years. However, this rate is still more than double the growth rate of the US stock market as a whole. Today, I’ll take you through the tech sector growth expectations, and also determine whether The9 is a laggard or leader relative to its tech sector peers. View our latest analysis for The9
What’s the catalyst for The9’s sector growth?
The battle for competitive advantage has led businesses to adopt new the cutting-edge technology, or risk being left behind. Many technologies are now coming into their own as their power and speed increase and the cost of delivering them goes down. And some are pursing growth through various strategies including new M&A, collaboration and alliances, as well as cost reduction and organic growth. In the previous year, the industry saw growth in the teens, beating the US market growth of 10.93%. The9 lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means The9 may be trading cheaper than its peers.
Is The9 and the sector relatively cheap?
The software tech industry is trading at a PE ratio of 32x, higher than the rest of the US stock market PE of 19x. This means the industry, on average, is relatively overvalued compared to the wider market. However, the industry did return a higher 12.98% compared to the market’s 10.46%, which may be indicative of past tailwinds. Since The9’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge The9’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? The9 has been a tech industry laggard in the past year. If your initial investment thesis is around the growth prospects of The9, there are other tech companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how The9 fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If The9 has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its tech peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at The9’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into The9’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other tech stocks instead? Use our free playform to see my list of over 1000 other tech companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.