Transitioning Hallo To Paid Service Will Generate New Revenue Streams

Key Takeaways

• Enhancing user experience and implementing user safety measures may boost engagement, trust, and retention, positively impacting revenue and margins.
  
• New initiatives like fixed U.S. buyer fees and the transition of Mercari Hallo could simplify transactions and generate additional revenue streams.
  
• Declining GMV and user experience challenges, combined with free services, pose risks to revenue and profitability across Mercari's businesses.

Catalysts

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

• Mercari is focusing on enhancing their core product features and user experience, which could lead to increased user engagement and higher GMV, thereby potentially improving revenue.
  
• The implementation of a fixed buyer fee rate in the U.S. aims to simplify transactions and alleviate buyer confusion, which may stimulate transaction volume and positively impact earnings.
  
• Mercari is investing in a safer and more secure user environment to reduce fraudulent activities, which could lead to increased user trust and retention, positively affecting net margins.
  
• The Mercari Hallo on-demand work service is expected to transition from a no fee promotion by March 2025, potentially generating new revenue streams and improving overall profitability.
  
• Expansion and growth within the fintech sector, particularly the credit business, could continuously increase core operating profit over time, enhancing earnings potential.

Mercari Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mercari's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.6% today to 10.5% in 3 years time.
• Analysts expect earnings to reach ¥24.2 billion (and earnings per share of ¥146.11) by about February 2028, up from ¥16.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥29.8 billion in earnings, and the most bearish expecting ¥20.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.9x on those 2028 earnings, down from 23.3x today. This future PE is greater than the current PE for the JP Multiline Retail industry at 17.7x.
• Analysts expect the number of shares outstanding to grow by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.42%, as per the Simply Wall St company report.

Mercari Future Earnings Per Share Growth

Risks

• The U.S. business experienced a significant decline in GMV by 27% year-on-year, which indicates challenges in maintaining market share and could impact overall revenue and profitability in that region.
  
• The GMV growth rates for the marketplace and U.S. businesses were below initial expectations, suggesting potential challenges in sustaining top-line growth that may negatively affect future revenue forecasts.
  
• Fraudulent use and user experience challenges were highlighted, necessitating increased investment in security measures; these additional costs could pressure net margins and profitability.
  
• The fintech business, while showing growth, may face risks related to expanding credit balances and maintaining high collection rates, potentially impacting earnings if financial management challenges arise.
  
• The company's strategy of not charging fees for Mercari Hallo currently excludes a source of revenue, which may affect net margins and delay overall profitability from this segment.

Valuation

• The analysts have a consensus price target of ¥2394.167 for Mercari 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 ¥3500.0, and the most bearish reporting a price target of just ¥1800.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥230.4 billion, earnings will come to ¥24.2 billion, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of ¥2307.0, the analyst price target of ¥2394.17 is 3.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.