EUR 850.00 For Business Accounts Only

Morningstar | Market's Concern for Rakuten's Plan to Invest in Highly Competitive Businesses Should Be Addressed

Our impression of Rakuten's June quarter results is mixed. On the positive side, we are encouraged with the solid growth of its fintech segment, including the contribution of the acquired insurance business, which will reinforce Rakuten's ecosystem. And in addition, profits from the investment of Rakuten Capital is also supporting its profitability. On the negative side, the slower revenue growth and margin contraction of domestic EC business suggest harsh competition in this field. Accordingly, we made minor updates to our earnings forecasts, which does not change our fair value estimate of JPY 1,080. While we see Rakuten's share as undervalued, Rakuten intends to invest in highly competitive areas. Rakuten's competitors are: 1) Amazon Japan on domestic e-commerce; 2) Line and Yahoo Japan on mobile payments; and 3) NTT Docomo, KDDI, and SoftBank on mobile network operators. We consider that concerns should be addressed for the market to re-evaluate the company.

Rakuten's operating income for the June quarter is JPY 61.6 billion, which is 2.2 times as large as the previous year's number, but materially in line with our forecast of JPY 30 billion, excluding Rakuten Capital's one-time investing profit of JPY 30.4 billion. While contribution from the acquired insurance business exceeded our forecast, we are somewhat disappointed that its operating margin on domestic EC business dropped to 14.6%, which is lower than 19.3% on the previous year and declining for seven consecutive quarters because of the larger incentive and delivery cost. We are concerned, therefore, that intense competition of EC market requires Rakuten to use more costs to maintain its user base.

Meanwhile, Rakuten mentioned that the total investment for 10 years to become a fourth mobile network operator, or MNO, will be smaller than its initial forecast of JPY 600 billion. At the results briefing, Rakuten's new CTO, Tareq Amin, who joined from Reliance Jio, the fourth MNO in India, showed confidence in establishing a reliable nationwide network with smaller costs. While we are still skeptical about the plan as other existing MNOs spend JPY 300-600 billion per year, we consider that this will somewhat mitigate the market's concern.