Digitalization And Mini Apps Will Unlock Global Opportunities

Key Takeaways

• LY's integration of AI, cross-border commerce, and Mini Apps positions it as Japan's super-app, unlocking substantial long-term growth in digital commerce, advertising, and payments.
  
• Ongoing investments in AI ad tech, payment systems, and global expansion provide durable competitive advantages, supporting accelerated margin and earnings growth beyond analyst expectations.
  
• Heavy reliance on core services amid rising costs, shifting advertiser demand, and regulatory headwinds threatens LY's advertising revenue and long-term earnings growth.

Catalysts

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

• Analyst consensus expects a 10% CAGR in cross-border e-commerce from the BEENOS acquisition, but this may be significantly understated given LY's early success with seamless data integration, AI-driven personalization, and ongoing cross-platform merchant onboarding, suggesting transaction value and revenue growth could accelerate past 15% annually as Japan's e-commerce penetration closes the gap with global peers.
  
• Analysts broadly agree that PayPay and its integration with PayPay Bank will incrementally expand financial services, but the scale of digital wallet adoption and deeper integration into both Commerce and Mini Apps make PayPay a likely candidate to materially disrupt traditional retail banking, driving compound net margin expansion and sustained double-digit earnings growth over the next five years.
  
• The rapid proliferation of LINE Mini Apps-up 55% in number and nearly 50% in monthly active users year-on-year-positions LY not just as a digital platform, but as Japan's central super-app ecosystem, enabling outsized long-run advertising, payment commission, and digital content revenue streams well beyond current projections.
  
• LY's ongoing investments in AI-enabled ad tech and first-party data collection provide a durable competitive advantage as the industry shifts toward privacy-centric, performance-based advertising, setting the stage for a step-change in ad inventory monetization, direct marketer spend, and EBITDA margin expansion over the medium to long term.
  
• As global internet access grows, especially in emerging Asia, LY is uniquely positioned to leverage its cross-border commerce, loyalty programs, and data-driven personalization engines to capture a large share of new online users, providing a robust pipeline for sustained revenue growth and margin improvement.

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 9.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.7% today to 11.1% in 3 years time.
• The bullish analysts expect earnings to reach ¥282.1 billion (and earnings per share of ¥42.26) by about September 2028, up from ¥150.7 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 18.0x on those 2028 earnings, down from 22.5x today. This future PE is lower than the current PE for the JP Interactive Media and Services industry at 23.5x.
• Analysts expect the number of shares outstanding to decline by 2.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.57%, as per the Simply Wall St company report.

LY Future Earnings Per Share Growth

Risks

• The ongoing decline in search advertising revenue, which fell more than expected due to reduced demand from major clients and changes in their ad placement standards, highlights LY's vulnerability to shifts in advertiser priorities, and such structural declines can lead to long-term pressure on overall advertising revenue.
  
• The company's increased investments in AI features and platform integrations, while strategic, are driving SG&A expenses higher, and with growing industry-wide regulatory compliance requirements and capital expenditures, persistently rising costs could erode net margins and limit future earnings growth.
  
• LY remains heavily reliant on a core domestic user base and main services like LINE and PayPay; any market share loss to tech giants or a loss of engagement among key demographics, especially due to the broader shift toward mobile-first, short-form, or competing platforms, could result in stagnating or declining revenue streams.
  
• LY's digital advertising business is particularly exposed to long-term secular trends like stricter data privacy regulations, rising consumer adoption of ad-blocking technologies, and ongoing fragmentation of user attention across platforms, all of which threaten to reduce its average advertising revenue per user and impact top-line growth.
  
• The strategy to grow through new features, mini apps, and e-commerce initiatives involves meaningful execution risk and faces challenges from increasing customer acquisition costs and industry competition, potentially pressuring future profitability and making sustainable earnings expansion difficult.

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 ¥2551.9 billion, earnings will come to ¥282.1 billion, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 7.6%.
• Given the current share price of ¥494.3, the bullish analyst price target of ¥650.0 is 24.0% 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.