BTS's Return And New Ventures Will Strengthen The Company's Global Presence

Key Takeaways

• BTS's return boosts revenue significantly, leveraging their global appeal and economies of scale for improved net margins.
  
• Strategic expansion and new ventures in gaming, AI, and digital subscriptions diversify revenue streams and enhance overall earnings.
  
• Record-high revenue met with impaired profitability due to strategic investments, increased costs, and regional expansions, challenging margins and profitability outlook.

Catalysts

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

• The resumption of BTS activities, including concerts and new releases, is expected to significantly boost revenue, leveraging BTS's global appeal and fan base. As BTS members complete their military service, their increased activity will contribute to both top-line growth and improved net margins due to economies of scale.
  
• HYBE's strategic expansion into new international markets, including Latin America and Japan, with local artist debuts and festival performances, is likely to drive revenue growth through increased market penetration and diversified income streams from international tours and album sales.
  
• The launch of Weverse Digital Membership, offering exclusive content and features, is anticipated to enhance recurring revenue streams. As the subscriber base grows, driven by demand from super fans, this could improve net margins by providing a high-margin revenue stream.
  
• HYBE's investment in gaming and AI technology is posited to create synergy with their music and entertainment offerings. By combining fan-based services with engaging game content, HYBE aims to open new revenue channels, which could substantially enhance earnings by leveraging existing IP and fan bases.
  
• Strategic partnerships and enhanced management capabilities in the U.S. and Latin America are expected to strengthen HYBE's global artist management and label operations, potentially leading to increased earnings as these markets mature and generate returns on previous investments.

HYBE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HYBE's revenue will grow by 15.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.9% today to 11.4% in 3 years time.
• Analysts expect earnings to reach ₩378.8 billion (and earnings per share of ₩9140.11) by about March 2028, up from ₩-18.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩448.0 billion in earnings, and the most bearish expecting ₩262.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.3x on those 2028 earnings, up from -513.3x today. This future PE is greater than the current PE for the KR Entertainment industry at 28.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.9%, as per the Simply Wall St company report.

HYBE Future Earnings Per Share Growth

Risks

• HYBE's operating profit margin declined despite record-high revenue, due to changes in revenue mix with the absence of BTS and investments in new groups and regions, which could affect net margins.
  
• The launch of new growth initiatives like Weverse and Games resulted in increased costs that are not yet translating into significant profit contributions, impacting earnings.
  
• Investments in regions like HYBE Latin America and debuts of new groups such as Katseye in the U.S. pulled down the bottom line, reflecting potential risks in generating immediate revenue from expansion strategies.
  
• HYBE continues to face impairments related to Ithaca Holdings, resulting in a net income loss, which suggests challenges in achieving profitability from its acquisitions and impacting overall earnings.
  
• The SG&A expenses increased due to higher outsourcing and other fees, including costs related to scaling the number of concerts, leading to pressure on operating margins.

Valuation

• The analysts have a consensus price target of ₩281363.636 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 ₩320000.0, and the most bearish reporting a price target of just ₩200000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩3319.3 billion, earnings will come to ₩378.8 billion, and it would be trading on a PE ratio of 39.3x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of ₩232500.0, the analyst price target of ₩281363.64 is 17.4% 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.