[Click eStock] "Kakao Unlikely to See Profit Growth Without Expansion Starting Next Year"

"November Overhaul, the Last Short-Term Opportunity"

On October 13, Shin Young Securities stated regarding Kakao, "From the second quarter of next year, it will be difficult to expect profit growth without underlying business expansion," adding, "The KakaoTalk overhaul scheduled for next month is likely the last short-term opportunity."

Seo Jeongyeon, a researcher at Shin Young Securities, said on this day, "Due to user backlash over recent changes to KakaoTalk, the company has announced plans to restore some features in November, which means the anticipated additional advertising revenue is unlikely to materialize." However, Seo added, "The impact on Talk Biz revenue from this situation will be limited," and pointed out, "There is still potential for Talk Biz growth through integration with ChatGPT and the launch of artificial intelligence (AI) agents."

Shin Young Securities forecasted that Kakao's third-quarter operating revenue would reach 2.0185 trillion won, and operating profit would be 162.4 billion won, representing year-on-year increases of 5.1% and 24.4%, respectively. Seo explained, "Talk Biz and Mobility are expected to grow by 8% and 25%, respectively, driving overall expansion. However, considering that negative growth has continued since the third quarter of last year, which has lowered the base effect, the company is maintaining a low-growth trend."

The significant increase in operating profit compared to top-line growth was attributed to a reduction in revenue-linked expenses. Seo noted, "Even after excluding the impact of changes in SM album production costs, the overall slow sales growth and weak performance in the content division have led to a substantial decrease in absolute amounts." Seo further evaluated, "If the low-growth trend continues in the content business and platform division in the absence of new game releases, the current performance trajectory could persist."

The target stock price was raised by 17% to 70,000 won, reflecting changes in the method of incorporating results by business segment and a reduction in the discount rate applied to subsidiaries' valuations. The investment opinion was maintained as 'Buy.'