Strict Privacy Laws And Intense Competition Will Erode Digital Markets

Key Takeaways

• Increasing regulatory pressure and competition are eroding LY's advertising effectiveness, revenue growth, and market share in core media and commerce businesses.
  
• Limited innovation and diversification expose LY to higher customer acquisition costs and margin compression, heightening risks to profitability and industry relevance.
  
• Strategic investments in AI, fintech, and digital commerce are driving sustained growth, margin expansion, shareholder returns, and better positioning in Japan's rapidly digitizing economy.

Catalysts

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

• Stricter privacy regulations and global data protection laws are set to further restrict digital targeting and measurement, weakening the effectiveness of LY's core advertising and affiliate offerings and putting sustained pressure on top-line revenue growth for the company.
  
• Rising consumer use of ad-blockers, premium services, and alternative digital environments is likely to fragment digital audiences, shrink LY's addressable markets, and drive significantly higher customer acquisition costs, resulting in lower net margins and diminishing the profitability of its media and commerce businesses.
  
• Persistent and intensifying competition from larger, better-capitalized digital platforms such as Google, Meta, and TikTok is expected to continue eroding LY's market share, reducing user engagement, and pushing advertising rates lower, which will lead to stagnant or declining revenue, especially as search advertising remains weak.
  
• Overreliance on cyclical advertising revenue, combined with limited diversification and structural underinvestment in innovation, positions LY as more vulnerable to macroeconomic downturns and to losing relevance both with advertisers and end-users, ultimately threatening sustained earnings and future growth.
  
• Accelerating industry consolidation and the proliferation of ubiquitous AI-driven recommendation features will make it increasingly difficult for LY to differentiate its platforms, resulting in further margin compression and a growing risk of being marginalized, forced to accept suboptimal acquisition terms, or losing bargaining power with key partners and advertisers.

LY Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on LY compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming LY's revenue will grow by 5.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 7.7% today to 7.5% in 3 years time.
• The bearish analysts expect earnings to reach ¥172.7 billion (and earnings per share of ¥26.52) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 19.6x 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

• LY is experiencing robust revenue and profit growth driven by strategic investments in AI, successful product revamps such as the LINE app overhaul, and strong adoption of new features including shopping and wallet integrations, which could support sustainable top-line and bottom-line improvements over the long term.
  
• Expansion of PayPay's financial ecosystem-including banking and securities consolidation and consistent double-digit growth in GMV and revenue-positions LY to capitalize on Japan's accelerating shift to cashless payments, supporting continued earnings growth and higher margins.
  
• LY's aggressive capital allocation strategy with substantial share buybacks and planned cancellation demonstrates a clear commitment to enhancing shareholder value and capital efficiency, which can buoy the share price over time as EPS rises.
  
• The rapid expansion and monetization potential of LINE Mini apps, along with growing uptake among small and medium-sized businesses for account ads and digital commerce, suggest a sizable addressable market and opportunities to lift recurring revenues and diversify income streams.
  
• The deployment of generative AI and personalized shopping experiences, combined with ongoing e-commerce growth and a secular trend of Japanese digital adoption, indicates that LY could benefit from increasing digital ad and commerce spend, boosting both revenue and long-term EBITDA margins.

Valuation

• The assumed bearish price target for LY is ¥434.97, which represents two standard deviations below the consensus price target of ¥572.73. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be ¥2306.3 billion, earnings will come to ¥172.7 billion, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 7.6%.
• Given the current share price of ¥494.3, the bearish analyst price target of ¥434.97 is 13.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.