Reasons Why Investment Ratings and Target Prices Rose Despite Reporting a Loss

NCSoft Posts Quarterly Loss for First Time in 12 Years, Target Price Raised
Focus on Management Reform Effects Over Immediate Earnings
Studio Dragon Turns to Loss but Investment Opinion and Target Price Up
Expectations for Earnings Improvement Next Year Lead to Upward Revisions

As the third-quarter earnings announcements continue this year, some companies have drawn attention for raising their investment ratings and target prices despite posting sluggish results, including losses. Securities firms appear to have raised their outlooks by focusing more on future improvement expectations than on the current poor performance.

According to financial information provider FnGuide on the 11th, seven securities firms consecutively raised their target prices for NCSoft following its third-quarter earnings announcement. Mirae Asset Securities raised its target from 190,000 KRW to 250,000 KRW, Samsung Securities from 240,000 KRW to 270,000 KRW, Daishin Securities from 190,000 KRW to 200,000 KRW, and Kyobo Securities from 200,000 KRW to 250,000 KRW. In addition, SK Securities, Heungkuk Securities, and Sangsangin Securities also raised their target prices for NCSoft.

Judging only by the consecutive upward revisions of target prices, one might assume that NCSoft’s third-quarter results significantly exceeded market expectations. However, in reality, NCSoft posted its worst performance in 12 years by recording a quarterly loss in the third quarter. On the 4th, NCSoft announced third-quarter consolidated sales of 401.9 billion KRW, an operating loss of 14.3 billion KRW, and a net loss of 26.5 billion KRW. Sales decreased by 5% compared to the same period last year, and operating profit turned negative due to increased operating expenses such as marketing costs. This marks NCSoft’s first quarterly loss since the second quarter of 2012, 12 years ago.

However, securities firms focused more on the effects of management reforms such as workforce reductions rather than the third-quarter results. Samsung Securities analyst Oh Dong-min said, "We raised the target price by 12.5% from the previous level, reflecting expected earnings improvement next year due to reduced labor cost burdens." He added, "NCSoft is rapidly implementing necessary reform measures through changed leadership, including reducing fixed costs, securing genre diversity, and expanding into global markets. Since significant earnings improvement is expected from next year when the effects of these changes materialize, now is an opportune time to invest as valuation pressure is not high."

There are also opinions that, although the changes are positive, a mid- to long-term perspective is necessary. Mirae Asset Securities analyst Lim Hee-seok said, "NCSoft is currently undergoing intense structural improvements, so a one-time surge in labor costs in the fourth quarter is inevitable." He evaluated, "Even if one-time costs occur significantly, it is positive that the company is transforming into a structure where leverage effects can be maximized through active restructuring." He added, "However, given the still high valuation burden, vague expectations for the next title and mere expressions of willingness to improve the business structure will not lead to re-rating. It is now necessary to confirm financially meaningful new title performance and a sharp reduction in operating expenses."

Studio Dragon also turned to a loss in the third quarter but saw its investment rating and target price raised. Studio Dragon posted an operating loss of 940 million KRW in the third quarter, returning to a loss compared to the same period last year. Sales dropped 58.5% to 90.3 billion KRW, and net loss was 6.1 billion KRW. DB Financial Investment viewed Studio Dragon’s earnings and stock price as having bottomed out, upgrading its investment rating from 'Hold' to 'Buy' and raising the target price from 46,000 KRW to 55,000 KRW. DB Financial Investment analyst Shin Eun-jung said, "A recovery to the 2023 earnings level is expected next year. The concretization of seven tentpole (high box-office potential) titles and eight pre-sales announced in this earnings report, along with the recently mentioned cost-efficiency strategy for Wednesday-Thursday dramas, has increased certainty in next year’s lineup and earnings estimates, indicating that both earnings and stock price have bottomed out."

SM Entertainment, which posted third-quarter results below market expectations, also saw its target price rise. SM reported third-quarter consolidated sales of 242.2 billion KRW, down 9% year-on-year, and operating profit of 13.3 billion KRW, down 74%. NH Investment & Securities analyst Lee Hwa-jung said, "SM recorded an earnings shock in the third quarter due to promotional expenses for the UK boy group Dear Alice exceeding expectations." She analyzed, "However, in the fourth quarter, following new releases from key artists, an earnings improvement trend is expected due to monetization of rookies and reduction of losses from subsidiaries in 2025." NH Investment & Securities changed the base point to next year when rookie investment results are expected to materialize and raised the target price from 97,000 KRW to 105,000 KRW.