Morningstar | Rakuten’s FVE Raised to JPY 1,100 Because of Lyft IPO, but Worries About EC Business Not Addressed. See Updated Analyst Note from 03 Jun 2019
We raise Rakuten’s fair value estimate to JPY 1,100 from JPY 950 to incorporate the value of gains from the Lyft IPO. Rakuten is the largest shareholder of Lyft, holding 13% of its shares, and the company recorded JPY 110 billion gains in first quarter of 2019 because of Lyft’s IPO on the Nasdaq. Other businesses were in line with our original forecast. While the revenue for the from domestic e-commerce, or EC, increased 14.7% from the previous year, its operating margin dropped to 12.7% from 17.7% in 2018 and 21.5% in 2017, which did not address our concern that Rakuten needs to continue paying heavy incentives to retain its user base and expand the growth of the transaction value of its EC site. Overall, we think Rakuten’s shares are currently fairly valued.Meanwhile, we are encouraged by the strength of Rakuten’s ecosystem. The cross-use ratio, the proportion of Rakuten subscribers using two or more Rakuten services, increased to 70.1% in the first quarter of 2019, from 68.1% in 2018 and 63.5% in 2017. We therefore believe the majority of Rakuten users are enjoying the benefit of Rakuten’s ecosystem, which provides the combination of EC, financial, and mobile businesses, encouraging users not to switch to another ecosystem. Owing to the increasing marketing and logistical costs, we forecast a margin contraction in the domestic EC business over the next five years, but we expect the financial businesses to drive growth in Rakuten’s profits.
Rakuten reiterated its plan to launch its mobile network operator, or MNO, business in October 2019. However, Rakuten plans to provide communication through its own network in only a few cities (Tokyo, Osaka, Nagoya, and part of Kobe), and use KDDI’s network to cover the rest of the country. While we understand that the roaming alliance will reduce initial capital expenditure and enable a faster launch, we forecast that the business will not be profitable for, at least, the first four years as a result.
Rakuten is mainly engaged in the Internet-related business. Along with its affiliates, Co. operates in two business segments. The Internet Services segment is engaged in the operation of electronic commerce sites, including an Internet shopping mall "Rakuten Ichiba," an online cash back site, a travel booking site, portal sites and digital contents sites; the sale of advertising on Co.'s sites; the provision of messaging and communication services; and the management of a professional baseball team "Tohoku Rakuten Golden Eagles." FinTech segment is engaged in the provision of Internet banking services and online securities trading services, and the credit card and life insurance businesses.
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