Naver Reports In-Line 2021 Result With Search Business Still Driving Profits

Naver reported a solid 2021 result with revenue up 28.5% year on year and operating profit up 9.1% year on year, with fourth-quarter revenue up 27.4% year on year and operating income up 8.5% year on year. The key search platform business, which underpins Naver’s narrow moat based on intangible assets and network effect, reported revenue growth of 15.2% in the fourth quarter, a slight slowdown from 18.2% in the first nine months of the year but still very solid given the first half was boosted by a very low comparable period driven by coronavirus. Management expects consolidated top-line growth to slow and for margins to expand but the timing on margin expansion is too early to predict. Despite a healthy consolidated operating profit margin of 19.4% driven mainly by the search business, management reiterated its key focus is on driving revenue growth and scale through its emerging businesses in e-commerce, fintech, content and cloud, and not on operating profit growth. We have downgraded our operating profit forecasts by around 5% as we factor in a slower margin increase, but the resulting lower fair value estimate was offset by our increase in fair value estimate of Z Holdings to JPY 700 from JPY 500. Our fair value estimate for Naver remains at KRW 375,000 per share. The stock is down around 30% from its peak in September, similar to its peers in Kakao and Coupang, and we see it as undervalued at these levels.