AI And Circular Economy Trends Will Transform Resale Markets

Key Takeaways

• AI-driven transformation, product acceleration, and fintech integration are set to boost operational efficiency, user engagement, and expand high-margin, capital-light revenue streams.
  
• International growth, cultural shifts favoring resale, and disciplined capital allocation position Mercari for sustained global market leadership and enhanced shareholder returns.
  
• Slowing growth, persistent fraud risks, rising costs, and overreliance on an aging domestic market threaten Mercari's ability to diversify revenue and sustain margins.

Catalysts

Plans, develops, and operates Mercari marketplace applications in Japan and the United States.

• Analyst consensus expects improved user experience and AI-driven fraud prevention to lift engagement and margins, but the scale and depth of Mercari's AI-native transformation-including 95% employee AI adoption, 70% AI-generated code, and a 64% surge in engineering output-poise the company for an unprecedented acceleration in product launches, operational efficiency, and long-term net margin expansion.
  
• Analysts broadly view international expansion and cross-border transactions as incremental revenue boosters, yet Mercari's recent fifteen-fold growth in cross-border GMV and strong foothold in high-demand Japanese IP categories position them to capture a dominant share of the rapidly globalizing resale market, which should drive sustained, double-digit top-line growth well beyond current forecasts.
  
• The rapid cultural normalization of the circular economy and secondhand goods, especially among younger mobile users, is likely to accelerate user cohort expansion and repeat transaction velocity on Mercari's app, catalyzing a step change in GMV and revenue as mainstream adoption snowballs across global markets.
  
• Mercari's embedded fintech ecosystem-with proprietary credit scoring, 5 million-plus cardholders, and crypto integration-is becoming a "super app" within the resale space, facilitating new capital-light revenue streams, higher take rates, and stickier user cohorts, ultimately boosting gross profits and core operating profit.
  
• Aggressive capital allocation discipline, with a pivot to share buybacks over dividends, improving credit ratings, and a focus on M&A, provides a clear path to enhanced shareholder returns and capital efficiency as the company shifts from growth at all costs to a phase of robust and sustainable earnings growth.

Mercari Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Mercari compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Mercari's revenue will grow by 8.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 13.6% today to 13.1% in 3 years time.
• The bullish analysts expect earnings to reach ¥32.6 billion (and earnings per share of ¥199.83) by about August 2028, up from ¥26.1 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 22.4x on those 2028 earnings, up from 13.5x today. This future PE is greater than the current PE for the JP Multiline Retail industry at 18.0x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.98%, as per the Simply Wall St company report.

Mercari Future Earnings Per Share Growth

Risks

• The company highlighted a slowdown in top line revenue growth in both Marketplace and U.S. businesses, with consolidated revenue up just 3 percent year on year and Marketplace GMV growth at only 4 percent versus a targeted 10 percent, suggesting secular stagnation that could impact long-term revenue and earnings growth.
  
• Mercari remains only halfway towards establishing a firm position as a safe and secure marketplace, and ongoing issues with fraudulent activity have previously required rapid countermeasures, indicating that persistent trust and fraud challenges could increase costs, erode user trust, and negatively impact net margins.
  
• The U.S. business, despite breaking even for the first time, has experienced a downward trend in GMV and revenue over the past three years, raising concerns that Mercari's limited international expansion success and intensifying competition may constrain long-term revenue diversification and overall earnings.
  
• The company acknowledges increased investment needs in areas such as AI, office relocation, and capitalizing development labor costs, suggesting that rising operating expenses may pressure margins and reduce near-term net income even as the company pursues growth.
  
• The company's reliance on Japan for its core user base, in the context of Japan's aging and shrinking population, creates demographic headwinds that may structurally limit addressable market growth and put downward long-term pressure on revenues and future earnings.

Valuation

• The assumed bullish price target for Mercari is ¥3500.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Mercari'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 ¥3500.0, and the most bearish reporting a price target of just ¥1800.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ¥249.0 billion, earnings will come to ¥32.6 billion, and it would be trading on a PE ratio of 22.4x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of ¥2141.0, the bullish analyst price target of ¥3500.0 is 38.8% 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.