Korea Investment & Securities said on the 21st that Kakao (035720.KS) is likely to post third-quarter earnings below market expectations, cutting its target price 11.7% to 53,000 won. The brokerage kept its "buy" rating but said investors should take a cautious approach while watching for the company's strategy to monetize its artificial intelligence business.
Analyst Jung Ho-yoon estimated Kakao's third-quarter revenue at 2.04 trillion won, up 3.8% from a year earlier, with operating profit rising 0.4% to 224.6 billion won. That operating profit falls short of the market consensus of 252.2 billion won. Compared with the previous quarter, revenue and operating profit are expected to fall 2.9% and 18.9%, respectively.
Growth is seen slowing across the company's main businesses. Talk Biz revenue is projected at 623 billion won, down 3.1% from the previous quarter, as both advertising and commerce weakened around the Chuseok holiday. Kakao Pay, previously a growth driver, is also slowing as stock market trading volumes shrink, leaving other platform revenue at an estimated 566.4 billion won, down 3.5% quarter-on-quarter. In content, falling webtoon revenue combined with weaker music results from reduced artist activity is expected to pull revenue down 6.1% from a year earlier to 847.7 billion won.
The brokerage pointed to execution in the AI business as the key factor for the stock going forward. At its "IF Kakao" conference on the 13th of this month, Kakao outlined a vision to build out, in phases, a PC agent service called Canvas based on its AI assistant Kanana Space, along with a range of agent services connected to KakaoTalk.
Investors should also assess the relative appeal of each business after the spin-off of Kakao AI and Kakao X, scheduled for January next year, the brokerage said. "Kakao AI, which carries a relatively lighter valuation burden and offers the prospect of results driven by AI, is likely to be more attractive as an investment than Kakao X," Jung said. "But the priority is a clearly presented strategy for monetizing AI."
