My investment rating for Naver Corporation stock (OTCPK:NHNCF) [035420:KS] is a Hold. In my September 30, 2019 initiation article, I described Naver as an “internet conglomerate” which “operates South Korea’s leading internet search portal, Naver.com.” Previously, I wrote about NHNCF’s Q2 2020 results, FY 2020 outlook, and corporate developments in my earlier August 18, 2020 update. The current write-up touches on Naver Corporation’s key threats and opportunities.
NHNCF’s Commerce and Search Platform segments face substantial competitive threats, and this is reflected in the company’s top line performance and revenue outlook. On the flip side, Naver Corporation’s planned listing of its Webtoon business could be a catalyst to drive a faster pace of growth for the company’s Contents segment. Taking into account both growth opportunities and competitive threats for the company, I downgrade my rating for Naver Corporation from a Buy to a Hold. The company’s shares are traded on both the Korea Exchange and the OTC (Over-The-Counter) market. Naver Corporation’s OTC shares have limited trading liquidity. But the company’s Korea-listed shares are pretty liquid and boast a three-month mean daily trading value of around $100 million.
Naver Corporation’s key businesses, namely the search platform and commerce segments, are facing serious competition from rivals. As indicated in its Q1 2024 results presentation slides, the search platform and commerce segments accounted for 36% and 28% of NHNCF’s most recent quarterly revenue, respectively. The Contents, Fintech, and Cloud & Future R&D segments contributed the remaining 17%, 14%, and 5% of the company’s latest first quarter top line, respectively.
Korea’s Yonhap News Agency reported in the middle of May that “Instagram overtook Naver” to become “the third most popular mobile app in South Korea in terms of usage time” in April 2024. According to a recent June 9, 2024 The Korea Herald news article, Korean internet users continued to spend relatively more time on Instagram as compared to Naver for May 2024. Also, it is worthy of note that the number of hours that South Korea’s internet users spent on Naver contracted by -15% between August last year and May this year. It is reasonable to be worried that Naver’s search platform advertising revenue will either grow slower or even decline as Instagram gains user share.
Separately, the company’s commerce segment also has to contend with tough competition. At its Q4 2023 earnings call (transcript sourced from S&P Capital IQ) on February 2, 2024, an analyst commented on the “steep growth of GMV (Gross Merchandise Value) from China-based cross-border platforms.” In response, Naver Corporation acknowledged that “these other Chinese platforms are our competitors.” As per an April 16, 2024 The Korea Times news report, Naver made the move to “offer special free delivery benefits to (the company’s) Naver Plus Membership users for three months” as part of efforts to compete with Coupang (CPNG). Coupang and Naver are the first and second largest players in South Korea’s e-commerce industry, boasting market shares of 22% and 20%, respectively, according to a May 31, 2024 Nikkei Asia article.
Notably, Naver Corporation highlighted at its recent Q1 2024 results briefing on May 4, 2024 that it is “testing” and “experimenting different things” relating to marketing, when the company was asked about the free delivery initiative. It is likely that NHNCF will have to invest significantly in marketing to remain competitive with CPNG. The increase in competitive intensity for NHNCF’s major business segments are reflected in the company’s financial numbers. Naver Corporation’s revenue missed the market’s consensus top line estimates for three consecutive quarters between Q2 2023 and Q4 2023, while the company recorded a slight +1.2% top line beat in Q1 2024. Also, Naver Corporation’s consensus FY 2024 and FY 2025 top line forecasts have been cut by -2.2% and -2.8%, respectively since the beginning of this year. This means that NHNCF’s revenue growth is projected to slow from +17.6% last year to +10.6% and +10.1% for 2024 and 2025, respectively.
NHNCF’s Contents segment has substantial growth potential for the medium to long term. I will focus specifically on the Webtoon business or sub-segment, which accounted for 88% (source: first quarter results presentation) of its Q1 2024 Contents segment revenue, for this section of the article. Webtoons are defined as “a type of digital comic that originated in South Korea and is read vertically by scrolling down on a computer or smartphone” by Victoria and Albert Museum. The Korea Herald published a news article on June 2, 2024 mentioning that Naver Corporation’s 71%-owned subsidiary WEBTOON Entertainment (WBTN) planned to “raise as much as $500 million at a valuation of up to $4 billion” with a “Nasdaq listing.”
WEBTOON Entertainment’s S-1 filing offers valuable insights about its growth prospects. WBTN’s revenue grew by +18.8% in 2023, which was faster than Naver Corporation’s +17.6% top line expansion for the previous year. In my opinion, WEBTOON Entertainment is well-positioned to maintain a reasonably fast pace of top line growth in the years ahead, considering various factors. Firstly, WEBTOON Entertainment’s current revenue is small relative to the size of its addressable markets. In its S-1 filing, WBTN indicated that “we see a market opportunity of approximately $130 billion in Paid Content, $680 billion in Advertising and $900 billion in our IP Adaptations businesses.” In contrast, WEBTOON Entertainment registered a top line of $1.28 billion for the most recent fiscal year or FY 2023.
Secondly, there is room for WBTN to expand further in international markets outside Korea, especially North America. WEBTOON Entertainment’s 2023 user penetration rate for its home market, South Korea, was 48% as per data sourced from its S-1 filing. As a comparison, the user penetration rates for WBTN’s Japanese, North American, and other markets were 17%, 6%, and 2%, respectively. WBTN also cited Euromonitor’s research in the company’s S-1 filing suggesting that “the TAM (Total Addressable Market) for web-comics and web-novels Paid Content in North America is projected to reach $10.5 billion by 2028.”
Thirdly, Naver Corporation could potentially utilize the IPO proceeds ($500 million estimate as per media reports cited above) from the listing of WEBTOON Entertainment to fund the growth of its Contents segment and Webtoon business. A June 5, 2024 media article published in The Chosun Daily drew attention to comments from analysts and industry experts suggesting that NHNCF might engage in “mergers, acquisitions or collaborations to penetrate the North American market” and solidify “its dominance in the content market” with the IPO funds. As mentioned earlier, the Contents segment is Naver Corporation’s third-largest revenue contributor after the Search Platform and Commerce segments. If the Contents segment and Webtoon business continue to grow at a healthy pace, supported by the IPO proceeds derived from WBTN, this could help to make up for the potential weaknesses of the Commerce and Search Platform segments to some extent.
I have assigned a Hold rating to Naver Corporation with my latest article. The prospects for NHNCF are mixed, considering the presence of both competitive threats and growth opportunities. Naver Corporation’s shares are fairly valued with its Price-to-Earnings Growth or PEG multiple of 1 times (17.5/17.4). The stock’s PEG metric is calculated based on its consensus next twelve months’ normalized P/E ratio of 17.5 times and its consensus FY 2023-2027 EPS CAGR of +17.4% as per S&P Capital IQ data. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
