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Morningstar | Yahoo Japan’s Solid Guidance Will Relieve Market’s Concern of Increasing Cost; Shares Undervalued

Yahoo Japan’s new operating income guidance of JPY 140-150 billion is in line with our expectation, and thus we will retain our fair value estimate of JPY 360, along with our narrow moat rating. While the company expects 5% revenue growth for the new fiscal year, increasing costs for video ad development, data servers, e-commerce, and mobile payment, will offset its sales growth. So, we consider that marginal cost to achieve revenue growth is becoming larger than in the past, and therefore, we forecast Yahoo Japan’s operating margin will remain fairly flat over the next few years. Meanwhile, we assess that Yahoo Japan’s target to become the top player of mobile payment business in the domestic market is reasonable as: 1) it will enhance Yahoo’s e-commerce businesses; and 2) Yahoo can leverage the transaction data to improve the accuracy of its ad targeting. While concern about the increasing cost dragged down Yahoo Japan’s share price approximately 40% over the past year, we view that Yahoo Japan will likely to be the winner of mobile payment and succeed monetizing in the longer run, as the company can leverage its rich cash flow from the ad business and resources of SoftBank group, which is the parent company of Yahoo Japan. We therefore believe that Yahoo Japan’s current share price is undervalued.

Yahoo Japan’s operating income for fiscal 2019 was JPY 140 billion, which dropped approximately 20% from the previous year, excluding the one-time factors. While its revenue increased 6%, operating margin dropped from 20.7% to 14.7%, as Yahoo increased marketing, personnel, and investment expenses to accelerate revenue growth. As a result, transaction value of Yahoo shopping has increased more than 20% for four consecutive years, and revenue from paid search advertising recorded double-digit growth, which is the first time in five years. Overall, we forecast that Yahoo Japan will achieve solid mid-single-digit revenue growth over the next five years.