[Into the Stocks] Kakao Dominating Daily Life with Mobility, Payments, and Leisure... Set to Accelerate Further in the Second Half

Top Beneficiary in the COVID-19 Era... Surged Over 300% in One Year
Record-Breaking Performance Day After Day... Restarting Momentum in the Second Half of This Year
Benefit from Upbit Stake Holding Boosting the Cryptocurrency Market

[Asia Economy Reporter Minwoo Lee] Kakao, which was the biggest beneficiary of the non-face-to-face (untact) culture expansion due to COVID-19, is poised for another growth this year. From the second half of this year, the profitability of new businesses and subsidiaries is expected to improve significantly, while the value of indirect equity holdings, including Upbit, the largest virtual currency exchange in Korea, is also projected to rise.

Stock Price Stagnated for 5 Years... Soared 300% Due to COVID-19

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Kakao is undoubtedly the top beneficiary in the COVID-19 era. After moving from KOSDAQ to KOSPI on July 10, 2017, it recorded its highest price of 168,000 KRW on October 13 of the same year, then declined for over a year. On October 30, 2018, it dropped to 86,000 KRW, the lowest price since moving to KOSPI. Although it began to rebound afterward, it was on the verge of surpassing 200,000 KRW early last year. On February 20, it reached 191,500 KRW, raising expectations. However, COVID-19 soon began to impact the domestic stock market. On March 19, when the KOSPI fell to the 1,400 level for the first time in about nine years, Kakao also plunged to 127,500 KRW.

However, the trajectory after the plunge was different from before. Outpacing the stock market recovery speed, Kakao's stock price soared to unprecedented heights. Due to the expansion of untact culture driven by social distancing, the time the entire nation spent on Kakao's platforms increased sharply. On the 16th of last month, it reached an all-time high of 519,000 KRW. It surged 307% in less than a year, becoming the 8th largest company by market capitalization on the KOSPI. This rise was overwhelming compared to the KOSPI's 120.9% increase during the same period.

Record-Breaking Performance Day After Day... Quarterly Sales of 1.2 Trillion KRW and Operating Profit of 150 Billion KRW Era

Along with the stock price, Kakao's performance has been setting new records daily. Starting from the second quarter of last year, which was directly hit by COVID-19, consolidated sales reached 952.9 billion KRW and operating profit 97.8 billion KRW, setting new records. In the third quarter, sales hit 1.1004 trillion KRW and operating profit 120.2 billion KRW, surpassing 1 trillion KRW in sales and 100 billion KRW in operating profit for the first time ever. These figures represent increases of 40.5% and 103.4% year-over-year, respectively. In the fourth quarter of the same year, sales were 1.2364 trillion KRW and operating profit 156 billion KRW. Records were broken every quarter.

In the first quarter of this year, growth is expected to stabilize somewhat due to the advertising off-season and COVID-19. According to financial information provider FnGuide, Kakao's market consensus for the first quarter of this year is sales of 1.2364 trillion KRW and operating profit of 156 billion KRW, representing increases of 42.38% and 76.38% year-over-year, respectively. Researcher Heo Jena from Kakao Pay Securities explained, "The pace of quarterly sales growth has slowed due to the advertising market entering the off-season, and portal business sales slightly decreased. Game sales declined compared to the previous quarter due to the absence of new releases."

New Business and Subsidiary Performance to Take Off... Steep Growth Expected from Second Half

After a slight pause, Kakao is expected to resume steep growth from the second quarter of this year. This is because the profitability of new businesses and subsidiaries is expected to improve significantly. Kakao Pay is seeing an increase in the proportion of payment transactions using Pay Money (prepaid), which is about three times more profitable than credit cards. The transaction volume of financial platform products linked to this is also expanding, and platform commission revenue is expected to increase. Mobility is also growing rapidly. Kakao T Blue taxi sales are clearly increasing, and with the launch of parking services this year, new revenue sources are expected to be added.

Attention is also focused on the business expansion of Kakao Entertainment, whose merger was completed on the 4th. Kakao Page and Kakao TV, which had been showing profitability improvements with rapidly increasing intellectual property (IP) distribution transaction volumes, and Kakao M, which operates content distribution, video production, music distribution, and management businesses, have become one company. Researcher Heo said, "The value chain has been completed from webtoon and web novel IPs to content producers and global platforms. Distribution of original content to external platforms is also underway, and market validation of capabilities is in progress." Additionally, IPOs of Kakao Pay and Kakao Bank are scheduled this year, which is also a positive factor. Major subsidiaries' IPOs are expected to proceed by 2022, and marketing expenses and investments are expected to increase, so high corporate valuations are likely to be maintained.

Holding Stake in Upbit... Kakao to Benefit from Cryptocurrency Market Boom

The booming virtual currency (cryptocurrency) market is also expected to benefit Kakao. Kakao holds about a 23% stake directly and indirectly in Dunamu, the operator of Upbit, the largest virtual currency exchange in Korea. Since Upbit is recording traffic and transaction volumes exceeding those of the fourth quarter of 2017, when the 'coin craze' occurred, Kakao's equity value is expected to increase. Kim Chang-kwon, a researcher at Mirae Asset Daewoo, explained, "The equity method profit reflected from Dunamu to Kakao in the fourth quarter of 2019 was about 29 billion KRW. If the cryptocurrency craze maintains its current level, equity method profit alone this year is expected to exceed 100 billion KRW."

Moreover, rumors of a U.S. listing are circulating, which could further maximize the equity value in the future. The industry expects that if Coinbase, the largest cryptocurrency exchange in the U.S., is listed on NASDAQ, its corporate value could reach 100 trillion KRW, and Dunamu's corporate value could be re-evaluated at around 10 trillion KRW.

In recent years, Kakao has evolved into Korea's top lifestyle service. Securities firms are competing to raise target stock prices. According to FnGuide, Kakao's average target price as of the 26th is 567,783 KRW. Ebest Investment & Securities suggested up to 660,000 KRW. Lee Seunghoon, a researcher at IBK Investment & Securities, said, "KakaoTalk is closely linked with services such as Pay, e-commerce, mobility, and Kakao TV. Kakao Mobility plans to expand T Blue to 30,000 units this year and actively apply electric and autonomous vehicles. Such technological advances, along with Kakao Enterprise services, could create new business opportunities in the B2B sector."

This content was produced with the assistance of AI translation services.