AI Integration And Fintech Expansion Will Improve User Engagement And Global Presence

Key Takeaways

• NAVER's AI integration in search, commerce, and content is poised to boost user engagement and ad revenue through enhanced personalization.
  
• Strategic expansions in fintech and cloud services, alongside successful partnerships, are driving substantial growth in both revenue and global market presence.
  
• Economic uncertainty and competitive pressures in AI and e-commerce could limit NAVER's revenue growth and strain operating margins despite strategic partnerships and cost optimization efforts.

Catalysts

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

• NAVER's integration of AI into their data analysis and personalization techniques is set to enhance platform capabilities across search, commerce, and content, potentially leading to increased user engagement, content consumption, and higher revenue from personalized ads.
  
• The launch and continued development of NAVER Plus Store, which emphasizes a personalized, discovery-driven shopping experience, has already shown positive consumer behavior, indicating potential for future growth in commerce revenue and user base expansion.
  
• The integration of generative AI into NAVER's AI services and content ecosystem aims to improve user satisfaction and content discoverability, likely leading to an increase in both impressions and monetization, positively impacting net margins and earnings.
  
• NAVER's focus on expanding their fintech business, particularly with the growth of NAVER Pay and successful partnerships like the one with Netflix, should drive increased transaction volume (TPV) and potentially boost revenue and net profit margins in the financial segment.
  
• Expansion efforts through NAVER Cloud, propelled by partnerships such as the one with Korea Hydro & Nuclear Power, as well as potential growth in the Middle East via NAVER Arabia, are expected to accelerate revenue growth in cloud services and global operations.

NAVER Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NAVER's revenue will grow by 11.0% annually over the next 3 years.
• Analysts are assuming NAVER's profit margins will remain the same at 17.8% over the next 3 years.
• Analysts expect earnings to reach ₩2619.2 billion (and earnings per share of ₩16868.09) by about March 2028, up from ₩1912.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩3193.0 billion in earnings, and the most bearish expecting ₩1972.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.4x on those 2028 earnings, up from 15.8x today. This future PE is greater than the current PE for the KR Interactive Media and Services industry at 16.2x.
• Analysts expect the number of shares outstanding to decline by 1.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.36%, as per the Simply Wall St company report.

NAVER Future Earnings Per Share Growth

Risks

• Political instability, economic uncertainty, and major social issues have led to a period of low growth in the e-commerce market, which could negatively impact NAVER's revenue growth and earnings potential.
  
• The financial results provided are based on preliminary data and are yet to be audited by an independent auditor, causing a risk of adjustment in NAVER's reported earnings or net margins.
  
• The introduction of generative AI technology increases operating costs, and intensified competition in AI development may pressure NAVER’s net margins if the anticipated synergy and revenue improvement do not materialize as swiftly.
  
• Despite the positive impact of the Netflix partnership, the churn rate among new subscribers could increase if the benefits offered are not perceived as valuable in the long term, potentially impacting revenue sustainability.
  
• Ongoing cost optimization efforts, including marketing expenditures and the expansion of user benefits to remain competitive, could strain operating margins if they fail to yield the anticipated increase in user engagement and spending.

Valuation

• The analysts have a consensus price target of ₩280618.519 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 ₩330000.0, and the most bearish reporting a price target of just ₩210000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩14685.2 billion, earnings will come to ₩2619.2 billion, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 8.4%.
• Given the current share price of ₩203500.0, the analyst price target of ₩280618.52 is 27.5% 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.