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Rakuten: International Expansion In Full Swing

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About: Rakuten, Inc. (RKUNY)
by: David Krejca
Summary

Rakuten is a leading Japanese e-commerce company, reaching over 1.3 billion people.

The company has recently broken into financial services and is successfully growing its current initiatives.

The company has profitability and the top 7 most visited sites in Japan.

Valuation suggests the company's shares are heavily undervalued and offer a sizeable risk buffer.

Investment Thesis

Over the last couple of years, shares of Rakuten (OTCPK:RKUNY), Japanese largest e-commerce and internet giant, have not considerably moved in any direction although the company's fundamentals have improved significantly. I believe this discrepancy between the share price and the company's development is unlikely to stay unnoticed for a longer period of time and the shares will soon set off on a journey towards higher values.

Corporate Profile

Founded in 1997, Rakuten is the Japanese largest e-commerce and online retail company with operations spreading across 30 countries, and the company's global ecosystem encompassing over 1.3 billion people. In recent years, the company has grown rapidly through acquisitions and rapid international expansion, mainly in the field of video streaming services, media, and insurance. Last but not least, the company is also a generous supporter and sponsor of various sports clubs and events such as Tohoku Rakuten Golden Eagles, Vissel Kobe, and FC Barcelona. As of 2018, Rakuten's workforce counted over 17,000 people of 70 different nationalities.

Key insights from the latest quarterly earnings call

Reading through the company's recent quarterly earnings call transcript, Rakuten's data-driven, innovation-focused, and entrepreneurial spirit is ever-present. Apart from emphasizing solid financial performance, the management dived deep primarily into the latest developments of its 4G and 5G initiatives and early medical and financial arms growth. Based on the CEO's comments, during the second quarter, the company has received commercial banking in Europe and Taiwan and is currently in the application process in the United States.

So, first, in Europe, we received the commercial banking operation license, and started the business since last year, and then for Taiwan and United States. And for Taiwan, I think it was last week that we received the license. And we are currently in the process of application.

- Hiroshi Mikitani, Rakuten's CEO

Financial Analysis

From the perspective of financial statements, the first thing that strikes one's attention is the company's exceptional profitability - ROE exceeding 19 percent. In terms of balance sheet's structure, the company employs a sizeable amount of leverage, with shareholder's equity representing only about 10 percent on the company's total assets.

Strong web traffic

According to website traffic portal Similarweb.com, Rakuten's main page Rakuten.co.jp has recorded almost 490 million visits in September this year, with an average visit lasting a little over six minutes.

Source: Similarweb.com

DCF Analysis

Plugging-in Rakuten's financial figures into my DCF template, the company's shares appear to be heavily undervalued. Under perpetuity growth method with a terminal growth rate of 2 percent, steady 16 percent annual revenue growth rate assumption, constant 17 percent EBIT margin, fair value of the stock comes at 4396 JPY (~ 41 USD). Under the EBITDA multiple approaches of a discounted cash flow model, the intrinsic per share value of the company stands roughly at 4630 JPY (~43 USD) if we assume that the appropriate exit EV/EBITDA multiple in five years' time is around 10x (currently 6x).

Source: Author's own model

Considerable risk buffer

Through the lenses of F.A.S.T. Graphs, Rakuten's shares seem to offer a generous margin of safety. Based on a forecasting model with adjusted earnings per share growth rate of 16 percent annually going forward, an estimated fair value of the stock in five years' time could be anywhere in the range of $23 to $46, depending on the price-earnings ratio that they will trade at.

Source: F.A.S.T. Graphs

The bottom line

To sum up, Rakuten is an extraordinary company trading currently at extremely low valuation multiples - price-to-earnings of 8x and enterprise value to EBITDA of 6x. As the company's underlying fundamentals showcase signs of steady improvement and the company intends to largely growth its international presence, it is unlikely for the shares to remain at depressed prices for an extended period of time.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Please note that this article has an informative purpose, expresses its author's opinion, and does not constitute investment recommendation or advice. The author does not know individual investor's circumstances, portfolio constraints, etc. Readers are expected to do their own analysis prior to making any investment decisions.