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Rakuten: Attractive Bet On Mobile

Jun. 02, 2020 6:40 PM ETRakuten Group, Inc. (RKUNY)2 Comments
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Tech and Growth
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Summary

  • Rakuten is now officially the 4th telecom operator in Japan after SoftBank, NTT, and KDDI.
  • As a new entrant with no legacy debt, it has a competitive advantage, which allows leveraging the latest cloud-based virtual network technology from the start.
  • Rakuten has partnered with KDDI to launch an offering at 50% cheaper price than SoftBank and NTT. KDDI has a bleeding market share and will be very incentivized to win.
  • At 1x P/S, Rakuten is an attractive buy. The stock has received a lot of pressure in the last few years, potentially due to the volatile profit margins and perception of over-expansion.
  • Rakuten is still the largest eCommerce player in Japan by far. Core business still grows at +18%, while it also has enough scale and capital to enter virtually any market.

Overview

Rakuten (OTCPK:RKUNY) is the largest eCommerce company in Japan. At ¥1.3 trillion (~$12 billion) of revenue in 2019, it is roughly 8 times smaller than SoftBank (OTCPK:SFTBY). Given its success in eCommerce, the company has diversified its business by expanding into fintech, media, logistics, and more through M&As, organic, and also minority investments in the last decade. Despite consolidated revenue consistently growing at +15% and even accelerating to ~18% in recent times, net income and ROE have been quite volatile.

The stock reached its all-time-high of ~¥2,000 per share in 2015, right after the business delivered an all-time-high ROE of 19.5%, driven by the five-year-high net income of ~¥71 billion. Since then, however, share price has been in a downward trend and now trades at ~¥976 per share, even after the company finally achieved an all-time-high net income of ~¥141 billion two years ago. Rakuten's continuing investments into new ambitious projects, which many view as over-expansion to some extent, may have played a role in driving such less favorable sentiment. All that aside, we found its recent ambitious expansion into the telecom sector to be highly attractive. We are bullish on Rakuten and believe that the current price level provides a good entry point.

Catalyst

Before Rakuten entered the market, there were three big telecom players in Japan: NTT Docomo (OTCPK:DCMYY), SoftBank, and KDDI Corporation (OTCPK:KDDIY). Given that these players have been relying on legacy infrastructures for decades, Rakuten has a strategic position as a new entrant since it will be able to leverage all the latest technology, such as the virtual cloud-based network, without having any legacy debt. This is why SoftBank, NTT Docomo, or KDDI will not be able to easily copy this move. KDDI, in the meantime, has entered a partnership with Rakuten to launch the offering. This is a good move by

This article was written by

Tech and Growth profile picture
2.74K Followers
Former tech operator, entrepreneur, and venture capitalist with over a decade of experience starting, investing, and building companies in Asia and US. Long-only manager seeking multi-asset technology / growth opportunities driving disruptive innovation globally.

Analyst’s 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.

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Comments (2)

I
Very nice article, I have also been investigating the Mikitani empire. Where do you find this info that that Rakuten has raised 650 bn JPY ... Their shares have only moved from 1.3 bn to 1.4 bn. Judging from recent prices this is only 100 bn dilution. Arigatou!
Tech and Growth profile picture
Thank you. it's over two years as seen on its FS.
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