Rakuten: Still Neutral Considering Results And Outlook (OTCMKTS:RKUNY)

Elevator Pitch

I rate Rakuten Group, Inc. (OTCPK:RKUNY) (OTCPK:RKUNF) [4755:JP] stock as a Hold. Previously, I wrote about RKUNY’s cash flow generation and debt refinancing in my prior September 19, 2023 update.

This latest article assesses Rakuten’s performance and outlook. The company’s Q1 2024 top line was in line with expectations, but its operating losses were wider than the consensus forecast. Looking ahead, Rakuten is likely to report robust revenue growth for its Fintech segment, while the company’s Mobile segment will most probably stay in the red. As such, I am staying Neutral on Rakuten.

The company’s shares can be bought or sold on the Tokyo Stock Exchange and the Over-The Counter market. The average daily trading values for Rakuten’s Japanese and OTC shares were $110 million and $0.2 million, respectively, for the past 10 trading days as per S&P Capital IQ data. Investors can trade in the company’s comparatively more liquid Japan-listed shares with US stockbrokers like Interactive Brokers.

Revenue Growth Acceleration Was Overshadowed By Wider-Than-Expected Operating Loss

Rakuten released the company’s financial results for the first quarter of this year on May 14. RKUNY’s Q1 2024 top line met the market’s expectations, but its recent quarterly operating losses were more substantial than what the analysts had anticipated.

The company’s revenue expanded by +8.0% YoY to JPY513.6 billion in Q1 2024. This represented a faster pace of growth as compared to its +3.0% YoY top-line increase for Q4 2023. Rakuten’s actual first quarter sales turned out to be slightly higher (+0.7%) than the market’s consensus revenue projection of JPY510.0 billion (source: S&P Capital IQ).

RKUNY’s Fintech segment was the star for the company in Q1 2024. This business’ outperformance was the main reason for Rakuten’s top-line growth acceleration in the recent quarter. The Fintech business saw its segment revenue grow by +15.1% YoY to JPY193.5 billion for the first quarter of the current year.

In its results presentation slides, Rakuten indicated that the company’s Fintech segment benefited from “growth in all services from expansion of customer base and transaction value.” The deposited assets for RKUNY’s securities brokerage sub-segment (Rakuten Securities) grew by +49.8% YoY to JPY29.4 trillion in Q1 2024, while deposits for its internet banking sub-segment (Rakuten Bank) increased by +15.4% YoY to JPY10.5 trillion for the recent quarter. The gross transaction value for the company’s credit card business (Rakuten Card) also rose by +12.5% YoY to JPY5.6 trillion in the first quarter of this year.

On the flip side, RKUNY’s Q1 2024 operating loss amounting to -JPY33.3 billion was worse than the sell side’s consensus estimate of -JPY29.4 billion as per S&P Capital IQ data. The company also recorded a -JPY33.3 billion operating loss for Q4 2023, so it didn’t achieve an improvement in operating profitability on a QoQ basis.

The company’s Mobile segment continued to be a drag on its overall operating profitability for the most recent quarter.

In February 2024, Rakuten’s Mobile segment introduced a new initiative known as “Saikyo (Strongest) Family Program” that provides a “100-yen discount off the monthly Rakuten Mobile SAIKYO Plan rate to members of the same family.” This is likely to have been the key factor driving a -2% QoQ contraction in ARPU (Average Revenue Per User) in Q1 2024. RKUNY’s first quarter Mobile segment operating loss was -JPY66 billion, which wasn’t that much better than the Mobile segment’s Q4 2023 operating loss of -JPY68 billion.

Expect More Of The Same In The Future

Rakuten’s performance for Q1 2024 is a reflection of what is likely to come for the company in the near future. It is likely that Rakuten’s Fintech segment will continue to deliver strong revenue expansion, while its Mobile segment struggles in terms of profitability.

An earlier April 1, 2024 Seeking Alpha News article noted that RKUNY has proposed to “integrate and reorganize its entire fintech business, including Rakuten Bank, Rakuten Card, Rakuten Securities, Rakuten Insurance, and other fintech ventures, into one group.” This restructuring exercise is expected to be concluded in October this year.

At its Q1 2024 earnings briefing, the company indicated that an integration of “Rakuten Card and Rakuten Pay functions” as part of this restructuring exercise for the Fintech segment “will boost the total number of people using the functions and Rakuten Pay, Rakuten Card.” RKUNY also mentioned at the recent quarterly earnings call that there is an opportunity to increase the usage frequency of other “high-value services by Rakuten Bank, Insurance and Life Insurance and Securities” with the integration of the Fintech segment’s various units. It is reasonable to assume the overall revenue growth prospects of Rakuten’s Fintech segment will become more favorable following the reorganization move.

On the other hand, Rakuten’s Mobile segment is still a work-in-progress when it comes to achieving positive earnings.

As indicated in its results presentation slides, RKUNY has set a goal to register “monthly EBITDA profitability” for its Mobile segment “by end of 2024.” This also implies that Rakuten’s Mobile business will most probably remain loss-making at the EBIT and net income level this year.

Separately, TelecomTV, a media outlet for the telecommunications sector, highlighted in a prior February 14, 2024 commentary that Rakuten’s Mobile segment will only boast “a single-digit market share come 2025” based on the “top end of its subscriber growth forecast.” In specific terms, the Japanese mobile market boasts in excess of 200 million subscribers, while the upper end of Rakuten Mobile’s subscriber goal as of end-2024 is 10 million (or a 5% share). This suggests that it will take more time for Rakuten’s Mobile segment to get to a certain size that delivers economies of scale supportive of positive earnings.

Final Thoughts

The overall business outlook for Rakuten is mixed, taking into account the prospects of its Fintech and Mobile segments. Also, Rakuten currently trades at 6.4 times (source: S&P Capital IQ) consensus next twelve months’ EV/EBITDA, which is quite close to its peer KDDI Corporation’s (OTCPK:KDDIY) (OTCPK:KDDIF) [9433:JP] consensus next twelve months’ EV/EBITDA metric of 6.1 times. Considering its business prospects and valuations, I choose to have a Hold rating for the stock.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.