[Into the Stocks] Naver Overturned by Kakao, Is There a Chance for a Comeback?

Naver rises over 8% today (23rd)
Abandons eBay Korea acquisition amid bull market → New business expectations

Kakao also up over 5%
Betting on steady earnings growth
Market cap may change depending on Kakao subsidiary IPO performance

[Asia Economy Reporter Ji Yeon-jin] Naver (NAVER) is making a move to reclaim the third spot in market capitalization. Since April until early this month, its stagnant stock price began to fall behind its competitor Kakao from the 15th, widening the market cap gap. However, from the early trading session on the 23rd, Naver showed strong performance, fiercely chasing Kakao.

According to the Korea Exchange, Naver's stock price surged by 9.21% compared to the previous day to reach 427,000 KRW on the day in the KOSPI market. This is a 52-week high. The previous high was 410,000 KRW on March 18. Naver, which had increased its value amid the untact trend due to COVID-19 last year, showed a sluggish trend since April. Meanwhile, Kakao raised its corporate value by continuously hitting new highs ahead of the IPOs of its subsidiaries such as Kakao Pay and Kakao Bank. As of 12:18 AM on the day, Kakao's market cap was 74.8021 trillion KRW, while Naver's was 69.3191 trillion KRW.

◆ Reason for the reversal = Based on consolidated financials last year, Naver and Kakao recorded sales of 5.3041 trillion KRW and 4.1568 trillion KRW, respectively. Operating profit was 1.2153 trillion KRW for Naver, more than double Kakao's 455.8 billion KRW. In terms of profit scale, Naver dominates.

However, Kakao's growth rate is much steeper. Based on last year's performance, Naver's sales increased by 21.76%, while Kakao recorded a growth rate of 35.4%. Operating profit growth was only 5.19% for Naver, but reached 120% for Kakao.

Comparing the first quarter of this year, Naver's sales increased by 29.83% year-on-year to 1.499 trillion KRW. Kakao's sales grew by 44.87% to 1.2579 trillion KRW, closely chasing Naver. During this period, operating profit for Naver (288.8 billion KRW) decreased by 0.99%, while Kakao recorded a 78.57% increase to 157.5 billion KRW.

The reason Naver was overtaken by Kakao can be found in the slowdown of profit growth. Since the second half of last year, Naver's operating expenses have rapidly increased, mainly due to significant rises in development and operation costs related to labor and marketing expenses driven by commerce expansion. Last year, Naver's development and operation costs increased by 16.3% year-on-year to 1.2 trillion KRW, and this year, due to salary increases and stock compensation costs, they are expected to rise by 29.5% year-on-year to around 1.5 trillion KRW. Additionally, marketing expenses for pay reserves and new businesses such as webtoons continue to increase.

◆ The card for a turnaround? = Naver and Kakao operate mostly similar businesses based on platforms such as online advertising, content, and messenger services. While Naver has recently been strengthening its commerce and content businesses, Kakao is expanding into financial services centered on KakaoTalk. Following Kakao Bank, Kakao Pay, and Kakao Securities, it recently entered Kakao Insurance.

Earlier this year, Naver's stock price surged significantly after acquiring Wattpad, the world's number one web novel and webtoon platform. Recently, rumors have circulated about acquiring Munpia and SM Entertainment. With increased interest in commerce following Coupang's listing on the New York Stock Exchange, Naver also partnered with Shinsegae to pursue the acquisition of eBay Korea. However, Naver announced in a disclosure the day before that "as part of strengthening business competitiveness, it considered acquiring some shares of eBay Korea but decided not to participate in the final acquisition process."

Initially, the market viewed Naver's entry into the eBay Korea acquisition battle as unlikely to create significant synergy. Naver's own open market, Smart Store, is growing rapidly at 40-50% annually, and eBay lacks strengths in logistics or fresh food, which are crucial in competition with Coupang, so there was little practical benefit. The sharp rise in Naver's stock price on the day appears to reflect expectations for other new businesses following the withdrawal from the eBay acquisition.

Kim Jin-gu, a researcher at KTB Investment & Securities, said, "The expansion of the content business is an important issue from the perspective of diversifying Naver's business portfolio and leveling up corporate value," adding, "Since advertising and commerce businesses are mainly domestic, visible results centered on the content business are necessary to increase the proportion of global business." He maintained a buy rating and a target price of 520,000 KRW for Naver on the day.

Jung Ho-yoon, a researcher at Korea Investment & Securities, said, "The proportion of sales from high-growth business units excluding advertising is expected to rise from 39.1% in 2019 to 51.8% in 2021, so Naver's sales growth trend will continue in the future," adding, "From the point when the increase in operating expenses begins to slow down, Naver's operating profit growth rate will normalize."

Some also raised the possibility that market capitalization reversal could occur depending on the IPO prices and early stock price trends of Kakao subsidiaries such as Kakao Bank and Kakao Pay, which are scheduled to go public in the second half of the year.