Company Reports

For the past 15 years, Naver has led the South Korean internet search market, through which it generates decent revenue growth, high margins, and strong cash flow. While Google has been taking overall search market share, we estimate that Naver retains around two thirds of the overall search market and a higher percentage of the lucrative local South Korean searches, which it monetizes primarily through display advertising and paid search placements. Naver’s strategy has been to use this strong search business to build an integrated internet platform business by adding other services including e-commerce, financial technology, content production, and cloud services. Naver has not yet been able to monetize these other businesses to the same extent as its search business but has strong number one or two positions in most of them in the South Korean market.

Naver reported fourth-quarter 2023 revenue growth of 11.7% with operating profit up 20.5% year on year to another quarterly record of KRW 406 billion, which is slightly better than our expectations. Excluding the effects of accounting changes from gross to net revenue in commerce, financial technology, and Webtoon as well as the acquisition of Poshmark, fourth-quarter revenue was up 8.3% year on year and 2023 revenue was up 11.8%. The key drivers of fourth-quarter operating profit growth were the search and e-commerce businesses, which increased operating profit by KRW 69 billion or 16% year on year and the content business, which reduced its operating loss by KRW 46 billion to KRW 32 billion. Cost efficiencies in both segments were key to the improved operating profit, but reduced depreciation also played a part. The company increased its average depreciation life span to five years from four years previously, which we estimate added around KRW 15 billion or 4% to quarterly operating profit. The Poshmark acquisition was completed as of Jan. 5, 2023, which added to revenue growth and although it was EBITDA-positive, its operating profit was not disclosed.

Naver 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.

For the past 15 years, Naver has led the Korean internet search market, through which it generates decent revenue growth, high margins, and strong cash flow. While Google has been taking overall search market share, we estimate that Naver retains around two thirds of the overall search market and a higher percentage of the lucrative local Korean searches, which it monetizes primarily through display advertising and paid search placements. Naver’s strategy has been to use this strong search business to build an integrated internet platform business by adding other services including e-commerce, financial technology, content production, and cloud services. Naver has not yet been able to monetize these other businesses to the same extent as its search business but has strong number one or two positions in most of them in the Korean market.

Naver reported second-quarter 2023 revenue growth of 17.7% with operating profit up 10.8% year on year to a quarterly record KRW 375 billion, ahead of 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 0.5% year on year in the second quarter, in line with the slowdown since fourth-quarter 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 business. The growth in operating profit was driven by a KRW 34 billion reduction in losses from the content business and a KRW 38 billion increase in profit contribution from the search and e-commerce businesses. We retained our 2023 revenue forecasts, which call for 18.5% revenue growth, but increased our 2023 operating profit forecasts by 18% with a smaller increase in outer years mainly due to the reduction in the content division's losses. We increase our fair value estimate for Naver to KRW 270,000 per share, from KRW 240,000 previously, and we see it as fairly valued at these levels.

For the past 15 years, Naver has led the Korean internet search market, through which it generates decent revenue growth, high margins, and strong cash flow. While Google has been taking overall search market share, we estimate that Naver retains around two thirds of the overall search market and a higher percentage of the lucrative local Korean searches, which it monetizes primarily through display advertising and paid search placements. Naver’s strategy has been to use this strong search business to build an integrated internet platform business by adding other services including e-commerce, financial technology, content production, and cloud services. Naver has not yet been able to monetize these other businesses to the same extent as its search business but has strong number one or two positions in most of them in the Korean market.

Naver 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.

For the past 15 years, Naver has led the Korean internet search market, through which it generates decent revenue growth, high margins, and strong cash flow. While Google has been taking overall search market share, we estimate that Naver retains around two thirds of the overall search market and a higher percentage of the lucrative local Korean searches, which it monetizes primarily through display advertising and paid search placements. Naver’s strategy has been to use this strong search business to build an integrated internet platform business by adding other services including e-commerce, financial technology, content production, and cloud services. Naver has not yet been able to monetize these other businesses to the same extent as its search business but has strong number one or two positions in most of them in the Korean market.

For the past 15 years, Naver has led the Korean internet search market, through which it generates decent revenue growth, high margins, and strong cash flow. While Google has been taking overall search market share, we estimate that Naver retains around two thirds of the overall search market and a higher percentage of the lucrative local Korean searches, which it monetizes primarily through display advertising and paid search placements. Naver’s strategy has been to use this strong search business to build an integrated internet platform business by adding other services including e-commerce, financial technology, content production, and cloud services. Naver has not yet been able to monetize these other businesses to the same extent as its search business but has strong number one or two positions in most of them in the Korean market.

Naver reported slowing underlying fourth-quarter 2022 revenue growth of 12.3% with fourth-quarter operating profit declining by 4.2%, both below our expectations. The key search platform business, which underpins Naver’s narrow moat based on intangible assets and network effect, reported revenue growth of 2.3% year on year in the fourth quarter, which is a slowdown given it reported 8,6% year-on-year growth in the third quarter. Given the lower-than-expected fourth-quarter revenue and profits, we reduced our underlying profit forecasts by around 10% in 2023, but see a recovery in the following years.

For the past 15 years, Naver has led the Korean internet search market, through which it generates decent revenue growth, high margins, and strong cash flow. While Google has been taking overall search market share, we estimate that Naver retains around two thirds of the overall search market and a higher percentage of the lucrative local Korean searches, which it monetizes primarily through display advertising and paid search placements. Naver’s strategy has been to use this strong search business to build an integrated internet platform business by adding other services including e-commerce, financial technology, content production, and cloud services. Naver has not yet been able to monetize these other businesses to the same extent as its search business but has strong number one or two positions in most of them in the Korean market.

Naver reported broadly in-line third-quarter 2022 revenue with 19% year-on-year growth, but operating profit was down 5.6%, which was below our expectations. The key search platform business, which underpins Naver’s narrow moat based on intangible assets and network effect, reported revenue growth of 8% year on year in the third quarter, which is a slowdown on recent quarters, but better than its key global peer Google. Given lower-than-expected third-quarter profits and weakening economic outlook we reduced our margin forecasts and underlying profit forecasts by around 20% in 2022 and 2023. We also incorporated the USD 1.2 billion acquisition of Postmark from 2023 onward, which further reduced earnings in 2023 by 9% with that impact breaking even in 2026. Added to this, our fair value estimate for Z Holdings has been cut to JPY 440 from JPY 600. All in all, our fair value estimate for Naver falls to KRW 240,000 per share from KRW 311,000 per share previously. The stock is down around 60% from its peak in September 2021, which is slightly better than peers Kakao and Coupang and we see it as slightly undervalued at these levels, although we see few near-term share price catalysts. The company announced a special dividend of KRW 137.1 billion, or around KRW 940 per share, in line with its shareholder return policy to return 30% of the last two-year average consolidated free cash flow defined as consolidated operating income plus noncash expenses minus capital expenditures minus taxes paid.

Naver has agreed to purchase online secondhand-fashion marketplace Poshmark for USD 17.90 per share in cash, implying an enterprise value of USD 1.2 billion, or around 6.5% of Naver’s existing enterprise value. The purchase price is marginally above Morningstar’s fair value estimate for Poshmark of USD 17.40 per share. The transaction is set to close by the first quarter of next year, pending Poshmark shareholders’ approval. We currently rate Poshmark as a no-moat company with a positive moat trend based on the potential for the company to develop a network effect.

Naver reported broadly in line second-quarter 2022 revenue with 23% year-on-year growth, but flat operating profit which was below our expectations. Divisional operating profit breakdown was provided for the first time with strong growth in operating profit from the cloud services business offset by increasing losses from the content business and increased research and development expenditure on future technology. Operating profits from search, e-commerce, and fintech were broadly flat. The key search platform business, which underpins Naver’s narrow moat based on intangible assets and network effect, reported revenue growth of 9.3% year on year in the second quarter, which is a slowdown on recent quarters, but still marginally above the mid-single-digit pre-COVID-19 growth levels.

For the past 15 years, Naver has led the Korean internet search market, through which it generates decent revenue growth, high margins, and strong cash flow. While Google has been taking overall search market share, we estimate that Naver retains around two thirds of the overall search market and a much higher percentage of the lucrative local Korean searches, which it monetizes primarily through display advertising and paid search placements. Naver’s strategy has been to use this strong search business to build an integrated internet platform business by adding other services including e-commerce, fintech, content production, and cloud services. Naver has not yet been able to monetize these other businesses to the same extent as its search business but has strong number one or two positions in most of them in the Korean market.

For the past 15 years, Naver has led the Korean internet search market, through which it generates decent revenue growth, high margins, and strong cash flow. While Google has been taking overall search market share, we estimate that Naver retains around two thirds of the overall search market and a much higher percentage of the lucrative local Korean searches, which it monetizes primarily through display advertising and paid search placements. Naver’s strategy has been to use this strong search business to build an integrated internet platform business by adding other services including e-commerce, fintech, content production, and cloud services. Naver has not yet been able to monetize these other businesses to the same extent as its search business but has strong number one or two positions in most of them in the Korean market.

Naver reported a broadly in-line first-quarter 2022 result, with revenue up 23% year on year and operating profit up 4.5% 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 12% year on year in the first quarter. Despite a healthy consolidated operating profit margin of 16.5% in the first quarter driven mainly by the search business, management reiterated its key focus is on driving revenue growth and scale through its emerging businesses in commerce, fintech, content and cloud, reiterating a target mentioned in the press last week of increasing consolidated revenue to KRW 15 billion by 2026. We see this target as a stretch given annual revenue growth in the five years to 2021 averaged 11% and this would need to increase to 17% to hit the 2026 target, despite having to grow from a higher base.

For the past 15 years, Naver has led the Korean Internet search market, through which it generates decent revenue growth, high margins, and strong cash flow. While Google has been taking overall search market share, we estimate that Naver retains around two thirds of the overall search market and a much higher percentage of the lucrative local Korean searches, which it monetizes primarily through display advertising and paid search placements. Naver’s strategy has been to use this strong search business to build an integrated Internet platform business by adding other services including e-commerce, fintech, content production, and cloud services. Naver has not yet been able to monetize these other businesses to the same extent as its search business but has strong number one or two positions in most of them in the Korean market.

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.

Naver reported a strong third quarter with revenue up 26.9% and operating profit up 19.9% 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 16.2% in the third quarter, a slight slowdown from first half’s 19.3% but still very solid. Despite a healthy consolidated operating profit margin of 20.3% driven mainly by the search business, management reiterated its key focus is on driving revenue growth and scale through its emerging businesses in commerce, fintech, content and cloud, and not on operating profit growth. We have upgraded our 2021 revenue forecast by around 8% but downgraded our operating profit forecast by 11%. Our long-term forecasts remain broadly the same, as does our fair value estimate of KRW 375,000 per share. The stock is up around 39% year to date and around 124% since the start of 2020, so it has had a very strong run and we see it as slightly over-valued at these levels.