Naver Earnings: Short-Term Weakness in Key Search Revenue, but Retain Positive Long-Term Outlook

Naver 035420 reported first-quarter 2023 revenue growth of 26.3% with operating profit up 9.5% year on year, both broadly in line with 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 0.2% year on year in the first quarter, in line with the slowdown in fourth-quarter 2022 in which it grew 2.3% year on year. We retained our forecasts, which call for 18.5% revenue growth and a 7.5% operating income decline. Our fair value estimate for Naver remains KRW 240,000 per share. The stock is down around 56% from its peak in September 2021 and we see it as undervalued at these levels.

The headline result was affected by a couple of accounting changes and consolidation of an acquisition. The company increased its average depreciation life span to five years from four years previously, which added KRW 22.5 billion or 7.3% to operating profit. It is also moving from a net to a gross basis for accounting in the content business, which will add to revenue and costs, but will have no impact on operating profit. The Poshmark acquisition was also completed as of Jan. 5. Excluding the Poshmark consolidation first-quarter revenue would have been up 17.1% year on year. Poshmark was also EBITDA-positive and although its operating profit contribution was not disclosed, we expect it would have had a mild positive impact on operating profit. In addition, because Naver’s share price had grown over the first quarter this year, whereas it fell in first-quarter 2022, its share-based compensation expenses increased to KRW 75 billion in first-quarter 2023 from KRW 23.6 billion in the same period of 2022. We do not know to what extent cash-based compensation movements may have offset this.