Kakao (035720.KS) shares have slid to the 35,000 won range as brokerages cut their target prices one after another. While second-quarter earnings are expected to meet market estimates, analysts point to uncertainty in the artificial intelligence business as a drag on the stock.
On Monday, both DB Securities and Hanwha Investment & Securities maintained their "buy" ratings on Kakao while lowering their target prices to 57,000 won and 62,000 won, respectively.
The second-quarter earnings outlook is not bad. DB Securities estimated Kakao's second-quarter revenue at 2.0126 trillion won, down 0.8% from a year earlier, with operating profit up 17.4% at 218.4 billion won. Hanwha Investment & Securities also projected revenue of 2.066 trillion won and operating profit of 223.7 billion won, in line with the consensus.
DB Securities said the advertising segment, led by business messaging, is maintaining growth of more than 20%, while display advertising (DA) will continue to grow on the back of expanded feed exposure.
The commerce segment is expected to grow about 8%, led by the Gift service, boosted by Family Month promotions. In the content segment, the music business is expected to show a solid trend centered on SM Entertainment, while the story and media businesses are analyzed to be relatively sluggish.
Cost burdens are also expected to be limited. While marketing costs for Piccoma during Japan's Golden Week will increase somewhat, labor and infrastructure costs are expected to remain stable.
The problem, however, is uncertainty in the AI business. Shin Eun-jung, an analyst at DB Securities, said, "ChatGPT for Kakao is estimated to have about 11 million cumulative users, but traffic metrics and external partner connections have not yet been fully realized," adding, "In the short term, it is essential to create an AI breakthrough through Kanana in Talk."
She continued, "Earnings are stable, but the stock has fallen excessively due to the absence of a future AI revenue model," explaining the background to the target price cut.
Hanwha Investment & Securities also forecast that the performance of the AI business will be a key variable in any future stock rebound. Kim So-hye, an analyst at Hanwha Investment & Securities, said, "The buzz and pace of user expansion for the AI services already launched are somewhat slower than the market expected, but the company appears to be focusing on user retention and completeness of experience rather than short-term traffic," adding, "Service integrations and global partnership onboarding that will expand the user base are scheduled soon."
Meanwhile, according to the Korea Exchange, Kakao closed at 35,400 won on Monday, down 200 won, or 0.56%, from the previous trading day. Compared with its intraday high of 173,000 won recorded on June 24, 2021, that represents a decline of about 80%, meaning the stock has shrunk to one-fifth of its value over five years.
