AI And Business Services Expansion Will Drive Future Opportunities

Key Takeaways

• KDDI's strategic pricing and service expansions, including collaborations with Lawson, are positioned to boost revenue and enhance average revenue metrics.
  
• Investments in AI infrastructure and IoT services are expected to drive growth in business demand, improving revenue and operating income margins.
  
• Hesitant AI investments and rising costs impact competitiveness, while shareholder actions and telecom pricing changes prompt potential revenue and valuation fluctuations.

Catalysts

Engages in the provision of telecommunications services in Japan and internationally.

• KDDI's implementation of new pricing plans for UQ Mobile and AU, along with innovations in value-added services like financial and energy services, positions it for revenue growth and improved ARPU (Average Revenue Per User) metrics.
  
• The strategic collaboration with Lawson, including initiatives such as Ponta Pass and Povo Data Oasis, is enhancing customer engagement and boosting Lawson's sales, which could positively impact KDDI's revenue and margins through partnership synergies.
  
• Expansion in Business Services, particularly in IoT-related services and the digital transformation (DX) sector, demonstrates robust growth potential which can drive revenue and earnings up through increased business demand.
  
• KDDI's investment in AI infrastructure, such as the establishment of data centers with advanced NVIDIA GPUs, positions the company to capitalize on the growing demand for AI services, potentially leading to increased revenue and operating income margins in the technology services segment.
  
• Ongoing initiatives to optimize and innovate in their telecom, AI, and BPO (Business Process Outsourcing) services can strengthen operational efficiencies and improve net margins, thereby enhancing earnings sustainability and future growth.

KDDI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KDDI's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.7% today to 12.8% in 3 years time.
• Analysts expect earnings to reach ¥795.2 billion (and earnings per share of ¥423.9) by about March 2028, up from ¥628.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥710.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.2x on those 2028 earnings, down from 15.2x today. This future PE is lower than the current PE for the JP Wireless Telecom industry at 18.1x.
• Analysts expect the number of shares outstanding to decline by 3.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.59%, as per the Simply Wall St company report.

KDDI Future Earnings Per Share Growth

Risks

• KDDI may be hesitant to make substantial AI investments compared to its competitors, which could impact future competitiveness and growth potential in an AI-driven market, affecting long-term revenue growth.
  
• The increased sales promotion and advertising costs to compete with rivals have impacted operating income, and continued high costs could pressure net margins.
  
• The changes in billing practices for data centers due to the fluctuating electricity costs have led to flat sales growth, potentially affecting revenue from corporate segments.
  
• The possible sale of shares by large shareholders, like Kyocera, could impact share prices in the short term, potentially affecting the company's valuation and attractiveness to investors.
  
• Despite increasing competition in the mid-capacity telecom market, which KDDI addressed with new pricing plans, the potential short-term impacts on communication ARPU revenues may lead to fluctuations in operating revenue.

Valuation

• The analysts have a consensus price target of ¥5167.417 for KDDI 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 ¥6300.0, and the most bearish reporting a price target of just ¥3730.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥6211.3 billion, earnings will come to ¥795.2 billion, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 4.6%.
  
• Given the current share price of ¥4810.0, the analyst price target of ¥5167.42 is 6.9% 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.