Naver and Kakao Continue Earnings Decline... "Need for New Revenue and Cost Reduction"

[Asia Economy Reporter Myunghwan Lee] As the earnings decline of Korea's leading internet stocks NAVER and Kakao continues, securities firms have diagnosed that these companies could create a turning point for stock price rebounds through new revenue generation and cost reduction. There was also advice that the webtoon business, which is running a large-scale deficit, needs to be solidified.

Hanwha Investment & Securities analyzed on the 27th, "Internet companies are experiencing both earnings decline and multiple contraction simultaneously."

Hanwha Investment & Securities forecasts that the revenue growth rates of these companies next year will slow to 18% and 15%, respectively. This is due to weak demand and decreasing user loyalty.

Hanwha Investment & Securities also analyzed that both NAVER and Kakao could expect to defend against revenue decline and achieve additional growth through contributions from new revenue streams. It was also diagnosed that whether Kakao's advertising rebound through the revamp of Open Chat and NAVER's sales of search advertising B2B (business-to-business) solutions can defend against next year's revenue decline will be key.

Whether structural improvement through cost reduction is achieved is also a major issue, Hanwha Investment & Securities pointed out. The platform industry has seen a significant increase in fixed costs due to overall favorable conditions and increased demand since last year, which has led to profit erosion for NAVER and Kakao.

However, Hanwha Investment & Securities noted that if strategies to reduce fixed costs, such as adjusting the pace of hiring and reducing commerce promotions, continue, there is a possibility of operating profit margin (OPM) improvement starting from the first quarter of next year. It is also expected that both NAVER and Kakao will execute efficient marketing focused on reactivation rather than large-scale marketing for acquiring new customers.

It was also diagnosed that the webtoon business, which has recently been running large-scale deficits, needs internal strengthening. For example, NAVER's content division losses expanded to 104.7 billion KRW in the third quarter. Sohe Kim, a researcher at Hanwha Investment & Securities, said, "The webtoon business, which had focused only on external growth, is incurring the largest deficits," but added, "Since NAVER Webtoon has formalized plans for a U.S. listing, the deficit is expected to significantly decrease."