Digital Advertising Trends Will Shape AI And Global Platforms

Key Takeaways

• Expansion into digital financial services and advertising integration positions LY for outsized growth through new markets, capital access, and unified audience targeting across major platforms.
  
• Broad AI deployment and increasing merchant adoption are set to boost user engagement, monetization, and operational efficiencies, supporting robust revenue and margin gains.
  
• Increasing regulatory pressures, shifting advertising trends, intensifying competition, slow user growth, and rising operational costs threaten LY's revenue growth, margins, and long-term profitability.

Catalysts

Engages in the online advertising and e-commerce businesses in Japan.

• Analyst consensus expects PayPay's evolution into a digital financial platform to drive meaningful financial services growth, but this could significantly outperform if PayPay's IPO delivers not only expansion in Japan but also accelerates international expansion, leveraging a potential U.S. listing and new capital to unlock multi-market revenue streams, materially increasing top-line growth and long-term earnings power.
  
• Analysts broadly agree that the integration of Official Account, MINI Apps, and business platform will drive steady growth, yet this likely understates the upside: monetization is poised to be dramatically amplified by a vast and underpenetrated addressable market (over 20 trillion yen), with a virtuous cycle of merchant onboarding, cross-service utilization, and AI-powered conversion funneling both rapid revenue and EBITDA expansion far above consensus.
  
• LY's imminent integration of the LINE and Yahoo! advertising platforms-unmentioned as a near-term growth driver by consensus-will allow for unified audience targeting and seamless ad buys across two of Japan's highest-reach platforms, unlocking significant new share from ongoing shifts in brand spend from traditional to digital channels, underpinning sustained double-digit advertising revenue growth and margin leverage from operational synergies.
  
• The full-scale deployment of AI agents across LY's 100 million-user ecosystem and 10 million merchant touchpoints, uniquely positioned to leverage proprietary content, data, and user context, will drive a step-function increase in user engagement, transaction frequency, and monetization rates, noticeably boosting revenue per user and overall profits as generative AI transitions users from passive consumption to high-value conversion actions.
  
• Accelerating mobile usage and ongoing expansion in e-commerce present an opportunity for LY to parlay cross-border and domestic transaction growth into scaled direct-to-consumer and local business partnerships, reinforcing a diversified revenue base and margin expansion thanks to increasing operational leverage as more merchants and advertisers adopt its integrated digital platform.

LY Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on LY compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming LY's revenue will grow by 9.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 8.0% today to 11.0% in 3 years time.
• The bullish analysts expect earnings to reach ¥280.2 billion (and earnings per share of ¥41.79) by about July 2028, up from ¥153.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 17.5x on those 2028 earnings, down from 25.8x today. This future PE is lower than the current PE for the JP Interactive Media and Services industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 4.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

LY Future Earnings Per Share Growth

Risks

• Rising global privacy regulations and growing consumer awareness around data protection could undermine LY's core data-driven advertising models, jeopardizing its ability to deliver personalized ads and negatively affecting long-term advertising revenue and profitability.
  
• The ongoing shift of advertising budgets toward emerging platforms such as streaming services and influencer-driven channels that are not central to LY's current ecosystem poses a risk of market share loss, limiting future revenue growth if LY cannot adapt quickly enough.
  
• Proliferation of AI-driven content creation tools may commoditize interactive media and services, heightening competition and eroding LY's pricing power and margins, which would put pressure on both revenue growth and net margins over time.
  
• LY's dependence on a suite of core digital services with limited diversification, combined with slower-than-expected international user growth and saturation in key domestic markets, suggests active user expansion may flatten, capping total revenue and constraining the company's long-term earnings trajectory.
  
• Escalating costs related to content moderation, AI investment, and compliance with increasingly strict global regulations could weigh heavily on LY's net margins and profitability, particularly as growth investments ramp up and as security spending remains high in the near term.

Valuation

• The assumed bullish price target for LY is ¥650.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of LY's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥650.0, and the most bearish reporting a price target of just ¥350.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ¥2537.0 billion, earnings will come to ¥280.2 billion, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 7.2%.
• Given the current share price of ¥556.3, the bullish analyst price target of ¥650.0 is 14.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.