BTS Return, KATSEYE Launch, And Weverse Monetization Will Drive Revenue And Enhance Profitability

Key Takeaways

• BTS's return boosts revenue and earnings, enhancing album sales, streaming, and concert revenues significantly.
  
• U.S. and Latin American market expansion and Weverse monetization strategies enhance diverse revenue streams and profitability.
  
• HYBE faces volatility in earnings due to nonoperating losses, declining music sales, military service schedules, outsourcing costs, and execution risks in global expansion.

Catalysts

Engages in the music production, publishing, and artist development and management businesses.

• The return of BTS members from military service is expected to boost overall album sales, streaming, and concert revenues. As they are a major source of HYBE's revenue, their active participation in the music scene can significantly enhance both revenue and earnings.
  
• Expansion into the U.S. and Latin American markets, including KATSEYE and new Latin artist lineups, indicates a diversification strategy that could lead to increased revenue streams, particularly in markets with growing music consumption, thereby potentially improving HYBE’s overall earnings.
  
• Weverse's introduction of a subscription membership service and new advertising streams is likely to enhance its profitability. Improved platform monetization is expected to favorably impact HYBE's net margins and earnings.
  
• HYBE's focus on advancing their game publishing business by leveraging their expertise in fan engagement and market analysis could unlock new revenue streams and improve overall profitability, potentially leading to higher earnings from diversified operations.
  
• Multi-label and inorganic growth strategies through M&As, combined with a diverse and robust music portfolio, are poised to drive sustained revenue growth and increase net margins by capitalizing on operational synergies and broadening market reach.

HYBE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HYBE's revenue will grow by 20.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.9% today to 10.5% in 3 years time.
• Analysts expect earnings to reach ₩391.7 billion (and earnings per share of ₩9442.82) by about December 2027, up from ₩-18.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩473.0 billion in earnings, and the most bearish expecting ₩295.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.4x on those 2027 earnings, up from -428.7x today. This future PE is greater than the current PE for the KR Entertainment industry at 16.5x.
• Analysts expect the number of shares outstanding to decline by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.41%, as per the Simply Wall St company report.

HYBE Future Earnings Per Share Growth

Risks

• The recognition of nonoperating losses, including valuation losses on equity stakes in other companies and FX losses, negatively impacted net income, indicating potential volatility in earnings.
  
• HYBE's revenue from recorded music sales decreased by 18.8% year-over-year due to fewer album releases, which could result in inconsistent earnings if this trend continues.
  
• The reliance on military service schedules for BTS members and anticipation of their return may cause fluctuations in revenue and net margins if their activities do not meet investor expectations.
  
• The increasing outsourcing costs have contributed to a declining margin trend; if not properly managed, this could continue to affect profitability.
  
• HYBE's strategy to expand globally, especially with new artist line-ups and projects, including in the U.S. market, involves execution risks that could potentially impede revenue growth if these efforts do not succeed as envisioned.

Valuation

• The analysts have a consensus price target of ₩257782.61 for HYBE 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 ₩315000.0, 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 ₩3733.6 billion, earnings will come to ₩391.7 billion, and it would be trading on a PE ratio of 34.4x, assuming you use a discount rate of 8.4%.
• Given the current share price of ₩194200.0, the analyst's price target of ₩257782.61 is 24.7% 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.