MINI Apps And PayPay Integration Will Drive Digital Transformation And Improve CX

Key Takeaways

• Focus on Official Accounts and MINI Apps aims to boost revenue through digital transformation and improved customer experience.
  
• Integration of PayPay services is driving financial sector growth, enhancing earnings and transaction value.
  
• Competitive pressures and market volatility may challenge revenue growth across various segments, while over-reliance on cost efficiencies could strain long-term profitability.

Catalysts

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

• The company's strategic focus on enhancing Official Accounts and MINI Apps is expected to drive digital transformation (DX) and customer experience (CX) for businesses, potentially leading to increased revenue from account advertising and improved profitability.
  
• The integration and consolidation of PayPay services are accelerating growth in the financial sector, with expectations for continuous revenue growth and increased transaction value, positively impacting overall earnings.
  
• LINE GIFT is anticipated to contribute significantly to commerce revenue growth, with intentions to maintain a growth rate exceeding 30% annually over the next five years, thus boosting both revenue and profit margins.
  
• The company's proactive initiatives in security measures and system improvements are expected to reduce operational risks and associated costs, likely bolstering net margins.
  
• Share buybacks and treasury share cancellations are expected to boost earnings per share (EPS) due to a reduced share count, while the ongoing high dividend payout ratio supports shareholder returns.

LY Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LY's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 8.2% in 3 years time.
• Analysts expect earnings to reach ¥184.0 billion (and earnings per share of ¥26.88) by about December 2027, up from ¥106.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥248.8 billion in earnings, and the most bearish expecting ¥161.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.8x on those 2027 earnings, down from 29.2x today. This future PE is lower than the current PE for the JP Interactive Media and Services industry at 25.4x.
• Analysts expect the number of shares outstanding to decline by 1.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.95%, as per the Simply Wall St company report.

LY Future Earnings Per Share Growth

Risks

• Potential fluctuations in the foreign exchange rate, such as a stronger yen, can affect cross-border transaction values, impacting the overall revenue in commerce and auction segments.
  
• The media display ad business faces growth challenges due to strong competition from platforms with advanced video capabilities, which may hinder revenue growth from display ads.
  
• The search advertising market exhibits volatility, particularly in partner sites, which could affect search advertising revenues despite recent stabilization in performance.
  
• The success of new products, like LINE MINI Apps, may face hurdles if user interface and user experience fall behind other applications, potentially impacting user adoption rates and commerce-related revenues.
  
• The reliance on cost reduction measures and efficiencies to drive profitability may face limits in the future, affecting adjusted EBITDA and long-term earnings growth.

Valuation

• The analysts have a consensus price target of ¥500.75 for LY based on their expectations of its future earnings growth, profit margins and other risk factors. 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 ¥300.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ¥2254.6 billion, earnings will come to ¥184.0 billion, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 7.0%.
• Given the current share price of ¥438.3, the analyst's price target of ¥500.75 is 12.5% 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.