[Into the Stocks] Even with Sluggish Earnings... Platform Leader Naver Keeps Running

1Q Earnings Expected to Be Somewhat Weak... Labor Costs Impact During Advertising Off-Season
Stock Rebound Speed and Scale Slightly Lag Behind Kakao
Recent Foreign and Institutional Demand Weakness
Coupang's Commerce Potential Also Fully Present in Naver
"Overseas Expansion Potential Including Japanese Market Surpasses Kakao and Coupang"

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Naver (NAVER) is expected to see somewhat sluggish performance in the first quarter of this year. While commerce and fintech (finance + technology) sectors will continue to benefit from COVID-19, the largest revenue source, the advertising segment, has entered its off-season. However, there is analysis suggesting sufficient potential for additional rebound as the commerce sector is still being re-evaluated following Coupang's U.S. listing.

◆Somewhat sluggish 1Q... Taking a breather in advertising off-season=According to the industry on the 9th, securities firms predict that Naver will post results below market consensus for the first quarter of this year. DB Financial Investment expects sales of 1.4954 trillion KRW and operating profit of 273 billion KRW. Compared to the same period last year, sales increased by 29.5%, but operating profit decreased by 6.4%. KB Securities projected sales of 1.486 trillion KRW and operating profit of 290.7 billion KRW. Korea Investment & Securities also forecasted sales of 1.502 trillion KRW and operating profit of 297 billion KRW. Overall, sales are expected to exceed the market consensus of 1.485 trillion KRW, but operating profit is estimated to fall short of the consensus of 303.5 billion KRW.

Hwang Hyun-joon, a researcher at DB Financial Investment, explained, "Commerce is performing well due to high growth in shopping transaction volume, and fintech growth driven by smart store-centered shopping has expanded the scale. However, operating profit fell short of expectations due to an increase in stock compensation costs from granting stock options to employees."

◆Main revenue source is advertising, but commerce holds the greatest potential=The largest portion of Naver's revenue comes from the search platform, which is centered on advertising. In the first quarter of last year, search platform sales accounted for 55.8% (645 billion KRW) of total sales of 1.1155 trillion KRW. Subsequently, it accounted for more than half each quarter: 53.1% in Q2, 52.2% in Q3, and 50.9% in Q4.

However, the sector with the greatest potential is commerce. Naver Shopping is experiencing continuous high growth domestically, and with Coupang's listing, the value of Naver's commerce division is also expected to be highlighted. Last month, Coupang was listed on the New York Stock Exchange in the U.S., receiving a corporate valuation of 100 trillion KRW. As of the closing price on the 8th (local time), its market capitalization exceeded 87 trillion KRW. Naver's market capitalization as of the previous day's closing price was 62.6665 trillion KRW. Jung Ho-yoon, a researcher at Korea Investment & Securities, said, "The value of Naver's commerce division is significantly undervalued compared to Coupang. Considering that both companies are currently recording outstanding growth in the domestic e-commerce market, this valuation gap is expected to narrow over time."

In fact, Naver Shopping is regarded as the strongest player in the domestic e-commerce market. By securing users within its ecosystem through partnerships such as Financial Plus membership, it is steadily strengthening. Thanks to this, even amid intensified competition with domestic e-commerce operators like Coupang, Naver Shopping's transaction volume in the first quarter of this year increased by about 40% compared to the same period last year, maintaining its lead.

It is also expected to emerge as a key player in various industries such as commerce and simple payment in the Japanese market. Through a joint venture with a 33% stake in Z Holdings, it is expanding the industry by introducing the smart store model to the Japanese market. Researcher Hwang said, "Naver Shopping, strengthened through partnerships this year, will reinforce its dominance in the domestic market through services such as grocery shopping and fast delivery. The expansion of the smart store business model in Japan will accelerate in the first half of the year, highlighting its value as a strong e-commerce player."

◆Stock price rebound is slower... Institutional and foreign investor demand is sluggish=However, the stock price rebound is lagging behind Kakao, which is also considered one of the two major platforms, both in magnitude and speed. When the KOSPI fell to the 1,400 level for the first time in nine years on March 19 last year, the stock prices were not much different. At that time, Kakao closed at 134,000 KRW and Naver at 144,000 KRW. But the rebound speed differed. From March 24 of the same month, Kakao's stock price overtook Naver's and widened the gap. On August 27 of that year, Kakao broke through 400,000 KRW, setting a new high. Meanwhile, Naver closed at 337,000 KRW on the same day, still remaining in the 300,000 KRW range. This contrasts with the atmosphere on December 24, 2019, when Naver's closing price of 182,000 KRW surpassed Kakao's 146,000 KRW.

This gap has been maintained until recently. Kakao recorded a new high of 561,000 KRW the day before and has maintained the 550,000 KRW range since. It rose about 24.3% from the 8th of last month to the day before. On the other hand, Naver hit a new high of 410,000 KRW on the 18th of last month but then fell back to the 300,000 KRW range. There is also a difference in demand. Kakao is the stock favored by foreign and institutional investors leading the domestic stock market. Since the beginning of this month until the day before, foreigners bought 262.5 billion KRW worth, and institutions bought 117.1 billion KRW worth. In contrast, foreigners only net purchased 33.1 billion KRW worth of Naver shares, while institutions net sold 191.2 billion KRW.

However, Naver is evaluated as a step ahead in global expansion. Kakao is based on the domestic market, but Naver Line is already a successful platform in Japan and Southeast Asia. Last month, Line, Naver's Japanese subsidiary, completed a business integration with Z Holdings, the operator of Yahoo Japan, securing a customer base exceeding 250 million. It is expected to expand its business in various fields beyond a simple internet portal, including e-commerce, content, artificial intelligence (AI), and cloud.