Company Reports

We downgrade Rakuten’s moat rating to none from narrow previously as we believe the uncertainties in the mobile business overshadow the ecosystem’s moat. We previously assigned Rakuten a narrow moat rating, based on intangible assets and network effect for its internet services and fintech businesses. Throughout the years, Rakuten Ichiba has maintained top share alongside Amazon, and Rakuten card, bank, and securities have each grown to be one of the top players in their respective segments. While we believe Rakuten’s e-commerce and fintech segments are undoubtedly moatworthy businesses, the mobile business’s huge losses since 2020 have unfortunately eclipsed the success of the rest of Rakuten. We also downgrade our Capital Allocation Rating to Poor, as we deem the investments in mobile and recent mergers and acquisitions have been unfruitful. We maintain our JPY 780 fair value estimate for now and will revise our projections after the next earnings release. We believe shares are currently fairly valued.

While Rakuten is most notable for its e-commerce platform, Rakuten Ichiba, we believe the company’s success in Japan lies in its first-mover advantage in establishing a comprehensive ecosystem composed of e-commerce, fintech, and mobile network services. Over the years, Rakuten accumulated over 40 million monthly active users, and close to 80% of users use more than two Rakuten services. We identify the convenience of accessing multiple services with one Rakuten ID and Rakuten’s point reward system as the main contributors for user stickiness.

We have mixed opinions about Rakuten’s March-quarter results. On one hand, we are encouraged by solid growth in both the fintech and internet service segments, which demonstrates the strength of Rakuten’s ecosystem. On the other hand, Rakuten mobile’s non-GAAP EBITDA loss of JPY 33.5 billion worsened by about JPY 4 billion from the December-quarter’s EBITDA loss of JPY 29.5 billion, due to heavier selling, general, and administrative costs with the launch of the “SAIKYO FAMILY Program.” We maintain our fair value estimate of JPY 780, as the improved outlook for the fintech segment is offset by heavier operating costs in the mobile segment in the next five years, to maintain high subscription growth. We think shares are currently fairly valued.

Rakuten, the earliest and largest business-to-business-to-customer e-commerce platform, has benefited from the structural shift from offline to online shopping in Japan.

Rakuten’s December quarter operating loss of JPY 33 billion improved by JPY 21 billion from the September quarter, due to shrinking mobile losses and higher fintech and internet margins. Shares rose more than 20% after the quarterly earnings announcement as investors were reassured by the improvement in mobile and management’s comments that bond refinancing risk for 2024 has been addressed through the issuance of USD 1.8 billion in USD-denominated senior notes in February 2024.

Rakuten, the earliest and largest business-to-business-to-customer e-commerce platform, has benefited from the structural shift from offline to online shopping in Japan.

On Jan. 25, Rakuten announced plans to purchase up to USD 1 billion of senior notes maturing in 2024 in advance of fourth-quarter earnings. The transaction will be funded mainly by the issuance of senior notes maturing in 2027 and cash on hand. If the transaction goes through as planned, Rakuten will be relieved of redemption of about JPY 145 billion (assuming JPY 145 per USD 1) in 2024, but still needs to raise JPY 176 billion by the end of this year. Due to a series of bond redemptions after 2024, prudent cash management is required for Rakuten. Although we are concerned that the interest payment burden will be heavy, given the current interest rate and Rakuten’s credit rating, extending the maturity of its debt helps alleviate the pressing cash burden. In the medium term, improving Rakuten Mobile’s cash flow through user acquisition and higher average revenue per user, or ARPU, will be the key to fundamentally improving Rakuten’s financial health. We retain our JPY 620 fair value estimate and believe shares are fairly valued.

Rakuten, the earliest and largest business-to-business-to-customer e-commerce platform, has benefited from the structural shift from offline to online shopping in Japan.

Rakuten, the earliest and largest business-to-business-to-customer e-commerce platform, has benefited from the structural shift from offline to online shopping in Japan.

Rakuten posted an operating loss of JPY 54.5 billion in the September quarter, largely unchanged from a loss of JPY 48.9 billion in the June quarter. Despite an increase in subscribers to 5.22 million from 4.81 million in the June quarter, operating loss in the mobile segment improved only slightly to JPY 81.2 billion from JPY 82.4 billion. Although we expect the pace of user acquisition to accelerate due to the revision of its incentive plans and increased promotions related to the introduction of the so-called platinum band, which is expected to begin in early 2024, we believe Rakuten Mobile’s EBITDA will turn positive in 2026, one year later than the company target, as a result of less room for cost reduction and limited room for average revenue per user growth. We make no changes to our fair value estimate of JPY 620 for Rakuten Group, as we broadly retain our assumptions that mobile losses will gradually shrink and the internet and fintech businesses will maintain healthy growth over the next few years. We think the stock is currently fairly valued.

Rakuten reported an operating loss of JPY 49 billion in the June quarter, an improvement of JPY 27 billion from the previous quarter, mainly due to narrower mobile segment loss, and partly on solid margin expansion in the financial technology segment. We are encouraged that Rakuten Mobile achieved a certain level of cost reduction, as the company has shifted gear to improve the business' profitability as the repayment of bonds issued for massive investments is becoming a risk factor. While we are pleased to see the improving indicators of the mobile business, we still believe that it won't achieve positive EBITDA until the second half of 2025—suggesting that Rakuten will need tight financial management for the time being, as it is expected to repay more than JPY 800 billion in bonds between 2023 and 2025. The company is exploring measures to raise funds such as listing Rakuten Securities, monetizing Rakuten Capital’s investments, and has also mentioned refinancing of bonds, but has yet to provide details. We, therefore, retain our fair value estimate of JPY 620 and our Very High Morningstar Uncertainty Rating on the company. We believe Rakuten’s shares are currently fairly valued.

Rakuten, the earliest and largest business-to-business-to-customer e-commerce platform, has benefited from the structural shift from offline to online shopping in Japan.

Rakuten’s March quarter operating loss of JPY 76 billion was a significant improvement from the JPY 113 billion loss in the previous year, thanks to Rakuten Mobile’s cost reduction and subscriber growth. What caught our attention more were the series of actions announced in recent weeks to improve the company’s financial position, which had deteriorated due to massive investments in the mobile business. In addition to Rakuten Bank’s listing in April, reduction of capital expenditures through the extension of the roaming agreement with KDDI and the issuance of new shares announced on May 16 will help alleviate concerns about Rakuten’s cash management. However, we revise our fair value estimate to JPY 620 from JPY 840, considering the dilution from the issuance.

Rakuten, the earliest and largest business-to-business-to-customer e-commerce platform, has benefited from the structural shift from offline to online shopping in Japan.

Rakuten reported the highest annual operating loss in its history, a whopping JPY 364 billion, mainly due to its unprofitable mobile business, following heavy investment, roaming costs, and slower-than-expected user acquisition. On the earnings call, management stated that operating expenses will decline significantly once the company completes the rollout of its nationwide telecom network, and mentioned that the company does not intend to increase gross debt in the future. We believe this allayed the market’s concerns somewhat as Rakuten’s share price jumped more than 7% in the next day.

Rakuten, the earliest and largest business-to-business-to-customer e-commerce platform, has benefited from the structural shift from offline to online shopping in Japan.

Rakuten, the earliest and largest business-to-business-to-customer e-commerce platform, has benefited from the structural shift from offline to online shopping in Japan.

Rakuten’s third-quarter results were below expectations, mainly due to a slower-than-expected improvement in the mobile segment’s profitability, as a result of lower retention of paid customers and higher-than-expected network costs (including roaming costs). Based on this, we cut Rakuten’s fair value estimate to JPY 1,000 from JPY 1,100 after toning down the operating income projections of the mobile segment in the next two years. Although the prospect of acquiring rights to use the platinum band is positive for Rakuten, it will still take some time before the network quality actually improves. Therefore, we are concerned that the capital expenditure burden on building base stations and marketing costs will continue to put pressure on Rakuten’s earnings for the time being. While we retain our view that Rakuten’s shares are undervalued, we will keep a close eye on the company’s fundraising strategy.

Rakuten, the earliest and largest business-to-business-to-customer e-commerce platform, has benefited from the structural shift from offline to online shopping in Japan.

Based on the weaker-than-expected improvement of the mobile business in the June quarter, we cut our 2027 revenue and operating income projection for Rakuten to JPY 2.78 trillion and JPY 269 billion, from JPY 2.95 trillion and JPY 326 billion, respectively, and lowered Rakuten’s fair value estimate to JPY 1,100 from JPY 1,300 accordingly. We think accelerating subscription growth and reducing roaming costs through expanding network coverage will continue to be the key for Rakuten mobile to become profitable. Although we lowered our fair value estimate, we retain our view that the stock is undervalued, as we believe that Rakuten is making solid progress in monetizing its user base and that mobile users will make a larger contribution to Rakuten’s ecosystem in the longer run.