[KOSDAQ Star] Kakao’s sprawling mobile empire yet to prove profitable

This is the second in a series of articles analyzing the top 10 companies by market capitalization traded on the tech-heavy KOSDAQ market. --Ed.

From online to mobile and back to off-line, Kakao’s empire of content, apps and services seems to know no limit.

With a mobile messenger app almost ubiquitous among smartphone users and the country’s second-largest Web portal, the company is expanding at a breakneck pace through mergers and acquisitions and experimenting with new revenue models from its Uber-like taxi-hailing service to a hair salon reservation app. Online banking will soon be added to its portfolio. 

Yet, there is one area where the company isn’t moving fast -- earnings.

“Kakao reported earnings that missed analysts’ expectations. Main culprits are online ads and gaming, the mainstay of revenue for Kakao, where sales slowed,” said Hwang Seung-taek, an analyst at Hana Financial Investment in Seoul.

Kakao reported Feb. 5 that its net profit came to 10.2 billion won ($8.45 million) in the October-December period, nearly 80 percent down from the 51.7 billion won it logged in that period a year earlier.

Kakao, which launched in October 2014 as a merged entity between the eponymous developer of the chatting app KakaoTalk and provider of the second-largest search engine Daum Communications, is seeing growth stagnating in the former Daum businesses, while new businesses built on the free mobile messenger service have yet to provide an alternative source of revenue, experts said.

Meanwhile, “aggressive business expansion and M&As are weighing down on its bottom line,” said Lee Dong-ryun, analyst at KB Securities.

By end-February Kakao is scheduled to close a 1.9 trillion won deal to buy control of the country’s top music streaming service provider, Loen Entertainment, for which the company needs to raise over 1 trillion won.

The disappointing earnings in the previous quarter and a prevailing view among experts that the ongoing quarter won’t be very different sent Kakao shares sharply down on the tech-loaded KOSDAQ exchange.

Kakao shares plunged 7.85 percent to 92,800 won Friday, closing below 100,000 won for the first time since June 2014. They slipped further to 92,300 won Monday, with foreign and institutional investors leading the sell-off. So far this year, the stock has lost nearly 20 percent.

Accordingly, the mobile behemoth’s market cap shrank.

The company, which last year competed with Celltrion for the crown of the exchange’s top-cap company, is now a distant runner-up to the pharmaceutical firm, with just 5.5 trillion won. Celltrion is now worth 11 trillion won.

Short-term earnings and stock price outlook may not be bright, but Kakao is nothing if not a company that charts its own path, like it did when it launched KakaoTalk as a free messenger app in 2010. The app, replacing fee-based text messaging via cellphones, is now used by 40 million people in a country of 50 million.

This year looks certain to be another year of big bets and business experiments for Kakao, as its 35-year-old CEO Rim Ji-hoon pushes further to turn that customer base into profit-generating avenues, with the expected launch of hair salon-booking app Kakao Hair Shop and designated driver-for-hire service Kakao Drive and the expansion of Kakao Taxi Black, a taxi-hailing service for luxury cabs. The company is also poised to launch one of the country’s first two online-only banks. It additionally expects a boost in content business with the takeover of Loen, which runs the MelOn music streaming service with 28 million users.

“Kakao’s O2O (online-to-off-line) services are starting to take shape,” Kim Chang-kwean of KDB Daewoo Securities said, referring to services like Kakao Taxi, Drive and Hair Shop. In the long term, the analyst said he was positive that the company would be able to build on its mobile platforms and create new monetization models.


By Lee Sun-young
(milaya@heraldcorp.com )