Non-core Ventures Will Erode Margins Amid Fierce Competition

Key Takeaways

• Expanding into new business areas and reliance on top artists increases financial risk, pressuring margins due to unproven investments and limited portfolio diversification.
  
• Industry competition, market saturation, regulatory challenges, and shifting digital platforms weaken pricing power and hinder global revenue growth.
  
• HYBE's diversified artist lineup, expanding international presence, digital ecosystem growth, and investments in tech-driven verticals support sustained revenue expansion and reduced operational risks.

Catalysts

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

• Expansion into non-core business areas such as gaming, AI audio tools, and global artist management requires heavy upfront investments without a proven path to profitability, putting sustained pressure on operating expenses and likely suppressing margins well below the historical average over the long term.
  
• The shift in digital media consumption habits, stricter cross-border regulations, and rising geopolitical tensions could undermine HYBE's ability to monetize international fanbases, ultimately stalling global revenue growth and reducing the effectiveness of direct-to-consumer digital platforms such as Weverse.
  
• Intensifying industry competition and over-saturation of the K-pop and pop markets threaten the premium pricing power of HYBE's music and merchandise portfolio, leading to lower album and content sales, flattening digital revenues, and diminishing earnings momentum even for newly debuted groups.
  
• The significant, continued reliance on top-performing artists such as BTS means any controversy, hiatus, or decline in group popularity could cause steep falls in concert revenues, direct artist sales, and overall profitability, as portfolio diversification efforts have not yet demonstrated sufficient scale or resilience.
  
• Ongoing copyright and royalty disputes driven by the further fragmentation of music consumption platforms and higher payout demands from global streamers are likely to erode net margins and shrink HYBE's share of the rapidly shifting digital music revenue streams.

HYBE Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on HYBE compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming HYBE's revenue will grow by 11.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.2% today to 11.4% in 3 years time.
• The bearish analysts expect earnings to reach ₩377.6 billion (and earnings per share of ₩9142.85) by about July 2028, up from ₩52.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 32.5x on those 2028 earnings, down from 242.8x today. This future PE is greater than the current PE for the KR Entertainment industry at 19.2x.
• 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 9.43%, as per the Simply Wall St company report.

HYBE Future Earnings Per Share Growth

Risks

• HYBE has successfully diversified its artist portfolio beyond BTS, achieving record-high revenues driven by strong global sales from groups like SEVENTEEN, Tomorrow X Together, ENHYPEN, and NewJeans, which indicates decreasing key man risk and supports continued top-line growth.
  
• The company is rapidly expanding internationally, with evidence of strong penetration into the US, Japanese, and Latin American music markets and plans to launch new groups and activities across different geographies, which is likely to boost future revenues and reduce regional concentration risks.
  
• HYBE's growing ecosystem of digital platforms, especially the expansion of Weverse with features like Digital Membership and fan engagement tools, is creating new high-margin, recurring revenue streams that are only beginning to be monetized, pointing towards improving margins and earnings.
  
• Investments in future growth areas such as gaming and AI-based services, supported by strategic partnerships and external funding, offer the potential for new business verticals that could meaningfully enhance revenue diversification and long-term earnings scalability.
  
• The ongoing shift in the global entertainment landscape-characterized by increased music streaming, the rise of global fandoms, the convergence of technology and entertainment, and the successful monetization of IP through merchandise and character brands-positions HYBE to capitalize on secular industry tailwinds supporting long-term revenue and profit growth.

Valuation

• The assumed bearish price target for HYBE is ₩228452.98, which represents two standard deviations below the consensus price target of ₩320541.67. This valuation is based on what can be assumed as the expectations of HYBE's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩390000.0, and the most bearish reporting a price target of just ₩210000.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩3311.8 billion, earnings will come to ₩377.6 billion, and it would be trading on a PE ratio of 32.5x, assuming you use a discount rate of 9.4%.
• Given the current share price of ₩305000.0, the bearish analyst price target of ₩228452.98 is 33.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.