South Korea’s leading internet platform offers multiple avenues into booming digital economy
Korea-listed Naver Corp is the global ICT company behind South Korea’s number one search portal, Naver, and its subsidiaries and affiliates provide services which include Line messenger, Snow camera app and metaverse platform Zepeto. Naver conducts R&D on artificial intelligence, robotics, autonomous driving, mobility, and other technology trends through its Naver Labs. In addition to operations in South Korea, the company has a presence in other Asian countries as well as in the US and France.
Our case for this company is that it is investing in the right businesses for both short term and long-term growth, with good business fundamentals. Naver’s investment in its content, cloud, and FinTech segments should provide near-term earnings visibility, while its commerce segment is expected to provide support for its long-term growth due to the shift to online services caused by the pandemic. Given the company runs a search platform, it should be able to study user patterns better to provide more personalised ads that would result in more paid clicks and conversion, which bodes well for the rest of its business segments.
Naver Corp operates five main business segments, which includes its search platform, commerce, FinTech, contents and cloud. For the company’s most recent FY2021 ended Dec 31, 2021, it performed well compared to FY2020. Operating revenue was up 28.5%, operating income rose by 9.1%, while adjusted ebitda increased 22.2%.
In terms of the segment breakdown, the search platform revenue increased 17.4% y-o-y as business queries increased with technology improvement, aided by its peak seasonality, continued performance ads growth and line-up addition including premium video ads for major brands. The commerce revenue grew 35.4% due to an increase in the number of brands stores along with an increase in monthly average sellers on its ecommerce platform. The FinTech segment rose 44.5%, mainly attributable to its Pay service which saw 60% y-o-y total payment volume growth, along with an increase in QR-based offline payment partners. The contents segment grew 50.6%, driven by growth in its cross-border content and IP business, while the cloud segment grew 38.9%, attributable to new orders from major clients and the unveiling of a metaverse ecosystem connecting real and virtual worlds.
Moving forward, the company’s long-term sales growth is expected to be strong, aided by its large portfolio of products such as Naver Pay and Naver Shopping. Also, for its search platform, sales growth is expected to rise as the company improves its ad coverage and domestic market strength. The company could also indulge in M&A to expand its global footprint of newer businesses, and Naver’s financials are expected to improve over the next few quarters from better synergy through the integration of its Line business with Z Holdings in March last year.
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The structural shift towards online retail is further expected to benefit Naver, as its share of South Korea’s online retail market is expected to grow strongly. Naver has shown good progress in this domain, where its e-commerce market share in Korea rose from 7% to 17% from 2016 to 2020.
The company’s advances in AI are expected to aid its business segments. This factor should enhance the user experience and further strengthen its proprietary edge over competitors and preserve its market share. For its search platform business segment, personalised ads are able to be generated as Naver uses deep learning technology to analyse its users’ browsing and purchasing patterns. These ads should be monetised better through more paid clicks and conversions, and more importantly, through optimising search results to improve user experience. This would help in retaining the company’s market share.
Sustained investments in its financial services would further provide long-term earnings visibility as the company plans to launch services such as credit card recommendations and insurance products, and this is further supported by the fact that it runs a search platform business with personalised ads which implies a large user base.
Chart 1 illustrates the company’s operating margin, which reflects its strong profitability. In terms of financial safety, the company has a current ratio of 1.3 times, and is net cash, implying that the liquidity and solvency risk is not a cause for concern.
The company also has a good record of positive net income, operating cash flow and free cash flow over the past five years. Naver has a relatively attractive earning yield and operating cash flow yield, which are 3.1% and 3.4% respectively, compared to the riskfree rate of 2.6%.
Sentiments-wise, there are 36 “buy” calls, and no “hold” and “sell” calls on the company from analysts. The average target price for the company is around 50% above its trading price of KRW333,000 ($374) as at Jan 22. Our in-house valuations indicate that the company is worth around 50% above its current trading price. Naver is the stock to buy for investors seeking growth with a relatively medium-risk appetite.
