Japan’s FANG Trio Have No Teeth
(Bloomberg Opinion) -- With technology stocks in the U.S. hitting another record this month, Japan’s equivalent of the FANG group may appear too cheap to ignore. Don’t be so sure.
Shares of the three largest internet firms have pretty much collapsed. Portal operator Yahoo Japan Corp. and e-commerce company Rakuten Inc. have tumbled more than 25 percent this year, while instant-messaging service Line Corp. has lost about 11 percent.
Their performance is drawing bets that the worst is over. Eashwar Krishnan of Tybourne Capital Management sees a 125 percent upside for Line shares, citing the trajectory followed by Facebook Inc. and Tencent Holdings Ltd. Line hasn’t even started making money from its 170 million monthly active users yet, Krishnan said at the annual Sohn Hong Kong investment conference last month. The company earns 0.12 cents per user minute spent, versus Facebook’s 0.75 cents.
Meanwhile, Rakuten is being seen as a potential takeover target. Walmart Inc. may be interested, following its $15 billion bid for India’s Flipkart Online Services Pvt., mused Amir Anvarzadeh of Asymmetric Advisors Ltd. E-commerce could be a rare growth area in Japan, given that it accounted for just 5.8 percent of retail transactions last year, versus 15 percent in China, according to Bloomberg Intelligence.
The problem is that the trio are spending billions on a virtual land grab, giving away all their profits for perhaps not much of a future.
Take a look at how little in operating profit Line has earned since its IPO in July 2016.
Yet the company can’t stop spending and investing in new services, ranging from Line Music and Line Pay to something as far-fetched as opening a cryptocurrency exchange. It plans to shell out up to 30 billion yen ($275 million) this year — equal to its entire 2017 operating profit — on artificial intelligence and fintech alone. Atul Goyal at Jefferies says Line has no viable business strategy, shooting darts at the wall and hoping to see which sticks.
Yahoo Japan and Rakuten face similar issues. Yahoo Japan has promised to sacrifice up to 30 percent of its 2018 fiscal year operating income in its quest to be the market leader in e-commerce. Rakuten, meanwhile, has seen operating profit dwindle from 110 billion yen in 2015 to 94 billion yen for the year ended in March.
Mobile payments, where the trio all want to establish a footprint, aren’t any easier. Domestic competitors aside, they are in bitter competition with deep-pocketed foreign rivals. Alibaba Group Holding Ltd. affiliate Ant Financial Services Co. just raised $14 billion in its latest funding round, mostly from offshore tier-one funds such as Singapore’s GIC Pte, to expand globally. Its Alipay system can already be used for clothes shopping in Osaka.
The three can forget about expanding overseas when Alibaba and Tencent are so busy buying users and startups. Monthly active users for Line’s three key markets outside Japan — Indonesia, Taiwan and Thailand — have been falling.
Meanwhile, there are challenging demographics at home. Even widespread use of in vitro fertilization has failed to raise Japan’s birth rate, which remains among the lowest in the world at 1.44 children per woman.
To be sure, profitability is never much on investors’ mind when it comes to tech. But at least the U.S. FANG quartet — Facebook, Amazon, Netflix Inc. and Google parent Alphabet Inc. — promise growth and quick dominance in foreign markets.
Their Japanese counterparts, on the other hand, have no teeth.
©2018 Bloomberg L.P.