Low Subscription Growth and High Network Costs Expected in 2023; Rakuten FVE Lowered to JPY 840

Rakuten 4755 reported the highest annual operating loss in its history, a whopping JPY 364 billion, mainly due to its unprofitable mobile business, following heavy investment, roaming costs, and slower-than-expected user acquisition. On the earnings call, management stated that operating expenses will decline significantly once the company completes the rollout of its nationwide telecom network, and mentioned that the company does not intend to increase gross debt in the future. We believe this allayed the market’s concerns somewhat as Rakuten’s share price jumped more than 7% in the next day.

However, we believe that the sluggish paid user growth is the real issue here, and we lower our fair value estimate for Rakuten to JPY 840 from JPY 1,000 previously, based on a more conservative outlook for user acquisition. Although Rakuten has set a challenging target of making the mobile business profitable in some months in 2023, we estimate that it will still take several more years for the business to become profitable on an annual basis due to the lack of subscribers. We believe that Rakuten’s shares are currently fairly valued.

Although the mobile segment’s JPY 112 billion loss in the December quarter improved from the JPY 120 billion loss in the previous quarter, we are concerned that the number of mobile network operator, or MNO, subscribers declined again in the December quarter, bringing the total number to 4.49 million from 4.55 million in the previous quarter. We estimate that many light users left due to the payment plan changes in July, but we are more concerned that a certain number of people decide to unsubscribe right after the free-of-charge period ends, as they are still not fully satisfied with the communication quality, despite the company’s efforts to expand network coverage.