Rising Regulation And Stiff Rivalry Will Crimp Prospects

Key Takeaways

• Rising regulatory costs, shrinking domestic demand, and strong global competition are expected to erode margins and limit growth across core business areas.
  
• Volatility in digital assets and commoditization of web services threaten earnings stability and increase the risk of long-term profitability decline.
  
• Transition to a holding structure, security expansion, digital banking, and new technology offerings are driving diversified, recurring revenues and operational efficiency for sustained growth.

Catalysts

Provides various Internet services worldwide.

• Increasing global regulatory scrutiny around data privacy and cybersecurity, especially as GMO expands its internet security and fintech businesses, is expected to significantly raise compliance costs and create barriers for international expansion, likely putting sustained downward pressure on net margins in the long term.
  
• The demographic crisis of Japan's aging and shrinking population is set to reduce domestic demand for internet, payment, and e-commerce services, directly threatening GMO's ability to grow its addressable market and thereby causing organic revenue growth to flatline or even reverse over time.
  
• Intensifying competition from global players-including Amazon, Google, Stripe, and PayPal-in cloud infrastructure, payments, and domain services is expected to erode GMO's market share and compress pricing power, driving structural declines in net margins and curbing EPS growth.
  
• Persistent volatility and rapidly changing regulations in the cryptocurrency and digital asset sectors, where GMO has been increasing its investments, are likely to make future earnings streams highly unpredictable and introduce heightened earnings volatility, undermining any reliability of sustained profitability improvements.
  
• With the ongoing commoditization of web and cloud services, margin compression is intensifying across the IT sector, and industry consolidation increasingly favors global scale competitors; as a mid-sized regional player, GMO faces elevated risk of margin erosion and potential market share loss, which points toward a secular decline in profitability and limits long-term earnings potential.

GMO internet group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on GMO internet group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming GMO internet group's revenue will grow by 8.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.8% today to 8.1% in 3 years time.
• The bearish analysts expect earnings to reach ¥29.3 billion (and earnings per share of ¥278.57) by about July 2028, up from ¥13.4 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 12.5x on those 2028 earnings, down from 27.7x today. This future PE is lower than the current PE for the JP IT industry at 17.2x.
• Analysts expect the number of shares outstanding to decline by 3.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.99%, as per the Simply Wall St company report.

GMO internet group Future Earnings Per Share Growth

Risks

• GMO Internet Group has achieved 16 consecutive years of top-line revenue growth and nine straight years of record performance in its infrastructure business, with a highly sustainable and predictable solid recurring revenue model that supports stable and growing revenues over the long-term.
  
• The company is undergoing a transition to a pure holding company structure, emphasizing greater autonomy for subsidiaries and more effective group synergy, which is designed to accelerate decision-making, drive growth, and improve operational efficiency, supporting potential net margin expansion in the coming years.
  
• The security business is entering a major expansion phase, leveraging GMO's position as the largest security provider in Japan with a differentiated suite of services, tapping into the long-term secular trend of rising cybersecurity demand, which will likely enhance future recurring revenues and profitability.
  
• GMO Aozora Net Bank has reached profitability and is scaling rapidly through in-house developed, cloud-based embedded finance services, positioning the group to capitalize on the ongoing digitalization of banking, increasing its potential for higher recurring transaction-based revenues and earnings growth.
  
• The launch and monetization of new growth drivers such as cloud services, AI platforms, and the integration of high-performing businesses like GMO TownWiFi and GMO Research & AI are diversifying revenue streams, reinforcing GMO's capacity to maintain or grow earnings and shareholder returns over the long-term.

Valuation

• The assumed bearish price target for GMO internet group is ¥2900.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of GMO internet 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 ¥4500.0, and the most bearish reporting a price target of just ¥2900.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥360.7 billion, earnings will come to ¥29.3 billion, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 11.0%.
• Given the current share price of ¥3649.0, the bearish analyst price target of ¥2900.0 is 25.8% 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.