Rising Costs And Fierce Price Competition Will Threaten Profitability

Key Takeaways

• Persistent regulatory, competition, and investment pressures are compressing profitability and limiting prospects for earnings and revenue growth.
  
• Rising debt levels and telecom spending are increasing financial risks and threatening group-wide improvements in net earnings.
  
• Mobile profitability, ecosystem synergies, AI-driven efficiencies, and improved financial flexibility are strengthening Rakuten's margins, profit outlook, and long-term growth potential.

Catalysts

Provides services in e-commerce, fintech, digital content, and communications to various users in worldwide.

• Regulatory environments are becoming increasingly complex, with global scrutiny on big tech and data privacy continuing to ramp up. This will likely drive Rakuten's compliance costs higher over time, pressuring operating margins and directly reducing earnings growth.
  
• The global transition to decentralized finance and the rapid adoption of alternative digital wallets threaten to weaken the customer base and transaction volumes for Rakuten's traditional fintech businesses. This can slow future revenue growth and diminish any potential expansion in take rates for Rakuten Bank and related services.
  
• Heavy investment requirements and ongoing network build-out for Rakuten Mobile continue to strain group-wide EBITDA and net margins, and without clear evidence of durable scale advantages, telecom may remain a persistent drag on group profitability and capital returns.
  
• The fierce price competition in e-commerce and broader retail sectors is expected to intensify, especially as global mega-platforms like Amazon and Alibaba leverage their international reach and resources. This persistent competitive pressure can compress Rakuten's gross margins and lead to slower top-line growth despite ongoing integration initiatives.
  
• High leverage, driven by continuous capital raises to fund telecom infrastructure and repay maturing debt, increases interest expenses and elevates the risk of future downgrades in credit ratings. This dynamic could lead to ongoing net losses and stymie improvements in net earnings, even if operational EBITDA targets are met.

Rakuten Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Rakuten Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Rakuten Group's revenue will grow by 4.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -8.8% today to 0.8% in 3 years time.
• The bearish analysts expect earnings to reach ¥21.2 billion (and earnings per share of ¥9.82) by about September 2028, up from ¥-210.9 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 87.6x on those 2028 earnings, up from -9.6x 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 0.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.02%, as per the Simply Wall St company report.

Rakuten Group Future Earnings Per Share Growth

Risks

• Rakuten Mobile has achieved stand-alone EBITDA profitability with surging subscriber growth, and ongoing network build-out is driving improved customer retention and ARPU, so Mobile may transition from a financial drag to a long-term profit driver, supporting overall EBITDA and net margins.
  
• The company's ecosystem synergies, exemplified by significantly higher e-commerce spend of Rakuten Mobile subscribers versus non-subscribers and successful cross-promotion strategies, position Rakuten to further boost customer lifetime value, cross-selling opportunities, and revenue growth.
  
• Sustained strong revenue and profit growth in core e-commerce, fintech, and mobile segments with group-wide operational improvements and AI-driven efficiencies suggest long-term expansion of margins and rising consolidated earnings potential.
  
• Rakuten's progressive integration of advanced AI and data-driven personalization is already increasing conversion rates, optimizing advertising returns, and elevating merchant and user engagement, which can unlock new high-margin revenue streams and further profit expansion.
  
• Ongoing deleveraging, tighter credit spreads, and diversified domestic and wholesale capital market access are improving the company's financial flexibility and cost of capital, reducing funding risk and supporting stronger future net earnings.

Valuation

• The assumed bearish price target for Rakuten Group is ¥616.12, which represents two standard deviations below the consensus price target of ¥955.0. This valuation is based on what can be assumed as the expectations of Rakuten Group'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 ¥1200.0, and the most bearish reporting a price target of just ¥510.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥2743.3 billion, earnings will come to ¥21.2 billion, and it would be trading on a PE ratio of 87.6x, assuming you use a discount rate of 11.0%.
  
• Given the current share price of ¥934.9, the bearish analyst price target of ¥616.12 is 51.7% 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.