Naver and Kakao's Justified Stock Price Surge

[Asia Economy Reporter Song Hwajeong] Amid expectations that corporate earnings in the second quarter of this year will inevitably decline due to the novel coronavirus infection (COVID-19), among the top market capitalization stocks on the KOSPI, only Naver (NAVER) and Kakao have had their earnings forecasts revised upward.

According to financial information provider FnGuide on the 29th, the consensus operating profit for the KOSPI in the second quarter is 25.3962 trillion KRW, down 21.88% compared to the same period last year, and has been revised downward by 11.12% compared to a month ago. In particular, earnings forecasts for the top market cap stocks are also declining. Among the top 10 by market capitalization, only Naver and Kakao have had their earnings forecasts revised upward compared to a month ago.

Naver's consensus operating profit for the second quarter is expected to increase by 78.62% year-on-year to 229.2 billion KRW, which is a 1.26% upward revision compared to a month ago. Kakao is expected to record an operating profit of 95.2 billion KRW in the second quarter, an increase of 135.23%. This figure was revised upward by 4.36% compared to a month ago.

Other stocks have seen their second-quarter earnings expectations lowered. Samsung Electronics is expected to record an operating profit of 6.348 trillion KRW in the second quarter, down 3.77%, and this forecast was revised downward by 11.78% compared to a month ago. SK Hynix is expected to have an operating profit of 1.5241 trillion KRW in the second quarter, a 139.03% increase year-on-year, but this forecast is 1.09% lower than a month ago. Samsung SDI's second-quarter operating profit is projected to decrease by 60.35% to 62.4 billion KRW, and this forecast was revised downward by 48.51%, the largest downward revision among the top 10 market cap stocks. Additionally, Hyundai Motor also saw its second-quarter operating profit consensus fall by 16.18% compared to a month ago, marking a double-digit downward revision. Hyundai Motor's second-quarter operating profit consensus is down 71.11% to 357.5 billion KRW.

Researcher Kang Bongju of Meritz Securities said, "Operating profit and net profit based on the KOSPI in the first quarter decreased by 28% and 37% respectively compared to the same period last year," adding, "With the COVID-19 impact fully materializing in the second quarter, corporate earnings are inevitably expected to contract year-on-year and face further downward revisions."

Due to expectations of strong earnings, Naver and Kakao's stock prices have risen. Naver's stock price has risen 21.77% so far this month until the day before. On the 26th, it reached an intraday high of 246,000 KRW, marking a 52-week high. During the same period, Kakao rose 45.11%. Kakao also recorded a 52-week high of 279,500 KRW intraday on the 26th. With this sharp rise in stock price, Kakao recently surpassed Hyundai Motor to rank 8th in market capitalization.

Researcher Kim Changkwon of Mirae Asset Daewoo said about Naver, "Although the stock price has surged recently, the outlook for earnings and stock momentum in the second half of the year has also improved," adding, "In the second half, continued growth in e-commerce, a turnaround to profitability in Naver Webtoon’s global business, full-scale launch of Naver Financial’s financial business, and the release of Smart Channel with targeted advertising are expected to bring an advertising revenue surprise."

Kakao’s stock price rise is analyzed to be driven by structural profit growth. Researcher Oh Donghwan of Samsung Securities said, "Kakao is expected to see structural profit growth this year due to sales growth in advertising and content, and profitability improvements in major subsidiaries such as tech-fin and mobility," adding, "As profitability improves with the introduction of revenue models, the corporate value of subsidiaries continues to grow, so the upward trend in stock price is expected to continue in the second half."