The Surge of Kakao Group Stocks at Rock Bottom... Is It Still a Good Time to Buy More?

KakaoPay and KakaoBank Surge 24% and 22% in a Week
Individual Stock Gains Overlap Amid Fed Pivot Expectations

Experts Simultaneously Lower Target Prices
"Recession and Inflation Impact Make Sustained Rise Difficult"

[Image source=Yonhap News]

The stock price of Kakao Group, which had fallen to the bottom, has shown a double-digit increase within a week, demonstrating a strong upward trend. The rise has accelerated due to expectations of a pivot (monetary policy shift) by the U.S. Federal Reserve (Fed) and individual positive factors for each company. Although individual investors' buying momentum has gradually increased since the beginning of this month with the shift to an upward trend, securities experts remain skeptical about actively purchasing the stocks.

As of 9:15 a.m. on the 9th, Kakao Pay's stock price was up 5.45% at 46,400 KRW. Other Kakao Group siblings such as Kakao (2.72%), Kakao Bank (5.31%), and Kakao Games (1.46%) also showed upward trends. Recently, they have maintained a steep rise; over the week from November 2 to November 8, the growth rates were Kakao (3%), Kakao Bank (22%), Kakao Pay (24%), and Kakao Games (5.8%). Compared to the year-to-date lows recorded after the KakaoTalk outage incident in mid-last month, Kakao (10%), Kakao Games (17%), Kakao Bank (37%), and Kakao Pay (35%) all showed significant increases.

The rebound in Kakao was mainly driven by expectations of growth stock gains due to the Fed's pivot anticipation. In April (local time), the U.S. October unemployment rate exceeded market expectations, signaling the beginning of a cooling labor market. Although the Fed emphasized maintaining a longer and higher rate hike stance, economic indicators differed from the Fed's intentions. As rate hikes strengthen, the discount rate for tech stocks typically rises, but with growing expectations of a policy shift, domestic leading tech stocks like NAVER rose 4.41% in the past week, and NCSoft (6.8%) and Pearl Abyss (11.9%) also increased.

Additionally, individual issues boosted Kakao Bank and Kakao Pay even more. In the case of Kakao Pay, the partnership with China's Alipay Plus was positively interpreted as opening the door to the Chinese local market. It is seen as an effort to expand payment channels following Singapore and Macau. Furthermore, Goldman Sachs recently issued a 'buy' report with a target price of 124,000 KRW, stimulating investor sentiment. The gap between Goldman Sachs' target price and the current price reaches 181%. Kakao Bank raised the index as institutions purchased stocks worth 18.4 billion KRW following strong third-quarter earnings.

However, experts say this is not a good time to expect a sustained upward trend. While temporary rises may occur due to external environmental changes, they do not recommend aggressive investment. Above all, looking solely at earnings, most Kakao siblings are expected to face thorny paths. The eldest, Kakao, is expected to see reduced profitability due to ongoing concerns about the slowdown in the digital advertising market, one-time revenue declines related to service interruptions, and associated costs. The revenue loss and compensation costs from service disruptions and ad suspensions over two days are estimated at about 40 to 50 billion KRW. Accordingly, Samsung Securities cut its target price by more than 33%, from 90,000 KRW to 60,000 KRW, and Hyundai Motor Securities (80,000 KRW → 76,000 KRW) and Kiwoom Securities (100,000 KRW → 72,000 KRW) also lowered their target prices simultaneously.

Samsung Securities researcher Oh Dong-hwan analyzed, "In addition to compensation for paid users, there is a possibility of additional losses due to compensation plans for free users. Considering the decline in core business growth rates due to economic slowdown, downward revisions of Kakao Games' profit forecasts, and delays in new service launches due to focus on damage recovery, operating profit estimates for next year are expected to decrease by more than 20%." Kakao Games recorded an earnings shock in the third quarter due to declining sales of 'Uma Musume' and 'Odin,' and the sales decline of these two games is expected to continue into the fourth quarter. Securities firms estimate operating profit at 43 billion KRW, down more than 7% compared to the same period last year.

Kakao's financial companies are also unlikely to easily overcome the waves of economic recession. Earlier, Kakao Pay lowered its annual transaction volume (TPV) guidance, increasing concerns about performance. Due to inflation, economic slowdown-induced consumption slump, and intensified competition in the simple payment market, the initial forecast (20-30%) was revised down to 15-20%. In particular, revenue declines in the financial services sector are expected to accelerate due to poor stock market performance and loan market regulations. Although Kakao Bank recorded profits exceeding market expectations in the third quarter, considering the downward revision of loan market forecasts and continued slowdown in platform fees, a gradual stock price rise is unlikely. KB Securities researcher Kang Seung-geon analyzed, "The company's non-interest income (platform, fee income) was -12.1 billion KRW in the third quarter, still maintaining a deficit and continuing a sluggish trend. For Kakao Bank to justify its valuation, it needs to confirm platform revenue expansion through new services."

Samsung Securities researcher Kim Jae-woo also analyzed, "Kakao Bank's stock price rise was based on expectations that it would secure a significant asset size in the banking industry in a short period due to rapid loan growth, and Kakao Pay's was based on expectations that fee income would grow through activation of brokerage in simple payments, loans, insurance, and investment products. The recent decline in Kakao Financial companies' stock prices means these market expectations have not been met, and differentiated growth is needed."