Advancements In AI And Hyper-Personalization Will Increase User Engagement And Drive New Revenue Opportunities

Key Takeaways

• NAVER's AI and hyper-personalized services aim to boost user engagement and ad revenue, enhancing margins through targeted advertising.
  
• Strategic resource allocation towards high-margin sectors is expected to sustain profit growth and progressively improve EBITDA margins.
  
• NAVER faces pressure due to competition, dependence on AI and personalized services, potential R&D costs, and challenges in e-commerce and application integration.

Catalysts

Provides online search portal and online information services in South Korea, Japan, and internationally.

• NAVER's enhancement of AI capabilities and expansion of hyper-personalized services are aimed at improving user retention and engagement, likely leading to increased advertisement revenue and higher margins from personalized ad targeting.
  
• The introduction of the NAVER Plus store and its future development into a standalone app are expected to enhance user shopping experiences, potentially boosting e-commerce revenue and driving GMV growth by improving personalization and discovery features.
  
• NAVER's integration of spatial intelligence and digital twin technology, exemplified by projects like those with the Saudi ministry, present new revenue streams in international markets, potentially enhancing overall earnings through diversification.
  
• Expanding NAVER Pay’s third-party ecosystem and off-line TPV growth highlights opportunities for fintech revenue growth, with higher transaction volumes leading to improved net margins from economies of scale.
  
• The focus on profitable growth through structural improvements, such as the allocation of resources to high-margin businesses and cost management, is expected to sustain operating profit growth and gradually enhance NAVER's EBITDA margin.

NAVER Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NAVER's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.0% today to 15.2% in 3 years time.
• Analysts expect earnings to reach ₩2139.4 billion (and earnings per share of ₩13960.72) by about December 2027, up from ₩1662.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩2393.0 billion in earnings, and the most bearish expecting ₩1591.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.8x on those 2027 earnings, up from 19.8x today. This future PE is lower than the current PE for the KR Interactive Media and Services industry at 25.4x.
• Analysts expect the number of shares outstanding to grow by 0.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.91%, as per the Simply Wall St company report.

NAVER Future Earnings Per Share Growth

Risks

• The earnings results provided are based on K-IFRS and have not yet been audited, which means there is a risk of financial adjustments that could impact future earnings or margins once reviewed.
  
• NAVER's growth heavily depends on the success of AI and hyper-personalized services, which require ongoing technological advancement and investment, potentially affecting net margins due to increased R&D expenses.
  
• Challenges in expanding and launching separate applications like NAVER Plus store could impact user traffic and ad revenues if not effectively integrated with existing platforms.
  
• There is significant competitive pressure in both the domestic and international markets, particularly from large tech companies like Google incorporating advanced AI features, which could impact NAVER’s ability to sustain revenue growth.
  
• Slow growth in the North American C2C e-commerce market, as seen with Poshmark, and the dependence on favorable content agreements, such as the one with Netflix, could hinder NAVER's ability to maintain strong revenue growth in its commerce and content sectors.

Valuation

• The analysts have a consensus price target of ₩242280.65 for NAVER 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 ₩320000.0, and the most bearish reporting a price target of just ₩180000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₩14044.1 billion, earnings will come to ₩2139.4 billion, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 7.9%.
• Given the current share price of ₩218000.0, the analyst's price target of ₩242280.65 is 10.0% 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.