NetEase Inc. (NTES) learned the hard way this week that modest growth doesn't cut it when Wall Street expects more. The Chinese gaming giant's stock dropped over 4% in premarket trading Wednesday after reporting fiscal fourth-quarter results that disappointed across the board.

The company posted quarterly revenue of $3.94 billion (27.55 billion Chinese yuan), representing a 3.0% year-over-year increase. Sounds decent until you realize analysts were expecting $4.10 billion. Meanwhile, adjusted earnings per ADS came in at $1.57, well below the consensus estimate of $1.85.

Gaming Division Shows Resilience Despite Revenue Miss

Here's where things get interesting. NetEase's core gaming business actually performed reasonably well, with games and related value-added services revenues climbing 3.4% to $3.14 billion. More impressively, the gross margin in this segment jumped 384 basis points to 70.5%. That margin expansion came courtesy of higher revenues from self-developed games including the enduring Fantasy Westward Journey Online alongside newer launches Where Winds Meet and Marvel Rivals.

The company's other business segments painted a mixed picture. Youdao (DAO) delivered solid 16.8% revenue growth to $223.75 million, though gross margin declined by 274 basis points to 45.1%. NetEase Cloud Music grew revenues 4.7% to $281.46 million while expanding gross margin by 273 basis points to 34.7%. The innovative businesses segment saw revenues decline 10.4% to $292.77 million, partially offset by a 176 basis point margin improvement to 39.6%.

Strong Balance Sheet and Dividend Boost

NetEase isn't hurting for cash. The company held $23.4 billion in cash and equivalents as of December 31, 2025, and generated $2.12 billion in operating cash flow during the quarter. That financial strength enabled the board to approve a quarterly dividend of 23.2 cents per share, or $1.16 per ADS, for the fourth quarter. That's a notable increase from the 11.4 cents per share (57 cents per ADS) dividend paid for the third quarter back in December 2025.

Betting Big on Artificial Intelligence

CEO William Ding used the earnings release to emphasize NetEase's growing integration of artificial intelligence across its operations. According to Ding, AI has significantly enhanced production efficiency while creating new interactive experiences for players.

"AI has become a foundational competency for our development and operations," Ding said, signaling that the technology will play an increasingly central role in the company's strategy going forward.

NetEase shares traded down 4.13% at $118.42 during Wednesday's premarket session, as investors digested the disappointing quarterly performance despite the company's longer-term AI ambitions and solid cash generation.