Naver Earnings: Record Operating Profit and Some Signs of Recovery in Search and E-Commerce

Naver 035420 reported third-quarter 2023 revenue growth of 18.9% with operating profit up 15.1% year on year, to a quarterly record KRW 380 billion, slightly better than our expectations. The key search platform business, which underpins Naver’s narrow moat based on intangible assets and network effect, reported revenue growth of only 0.3% year on year in the third quarter. This is a continuation of the slower growth seen since the fourth quarter of 2022, but we believe this is related to an industrywide advertising slowdown and does not reflect any significant deterioration in the competitive position of this narrow-moat business. Management indicated that it believed it is seeing some signs of recovery, and expects the key search and e-commerce revenue to grow a bit faster in the fourth quarter than they did in the third quarter.

The growth in third-quarter operating profit was driven by a KRW 43 billion reduction in losses from the content business year on year and a KRW 30 billion increase in profit contribution from the search and e-commerce businesses year on year. We increased our operating profit forecasts by around 3% with our 2023 net income forecast reduced by 21% due to various nonoperating items. Our fair value estimate for Naver is retained at KRW 270,000 per share, and we see it as undervalued at these levels.

Recall that this year’s results were affected by some accounting changes and consolidation of an acquisition. The company increased its average depreciation life span to five years from four years previously which added around KRW 23 billion or 7% to operating profit. It has also moved from a net to a gross basis for accounting in the content business which adds to both revenue and costs but has no impact on operating profit. The Poshmark acquisition was completed on Jan. 5, 2023. Excluding the Poshmark consolidation, the second-quarter consolidated revenue would have been up 14.5% year on year.