[Stock Update] Rakuten Inc. (4755): Addressing Huge Debt Pile and Mobile Division Turnaround

Please note: This article is for informational purposes only and is not intended as investment advice. The mention of specific stocks is not a recommendation to buy or sell any securities.

What's Changed for Rakuten?

Back in January, I was pretty bearish on Rakuten, and for good reason. They were dealing with a hefty profit warning for Q4 FY22 and some serious issues in their mobile division. Fast forward to now, and boy, have things shifted a bit.

Read the full analysis here:

[Stock-Analysis] Rakuten (4755 TYO): The Amazon of Japan's Failed Move into Mobile - Updated 2023/01/30

First off, let's talk numbers. Since my last analysis, Rakuten's stock has slipped around 11%, which is pretty stark compared to the NIKKEI 225's nearly 18% rise. That's a significant underperformance, pointing to continued investor skepticism.

Rakuten's decision to sell a sizeable chunk of Rakuten Bank to overseas investors is a major move. This sale is part of their strategy to ease up their debt burden, which is crucial considering they've got a whopping JPY797 billion of debt maturing in the next couple of years. The sale could lighten this load, giving them more breathing room.

Moreover, their losses in the mobile unit have narrowed in Q2. This is a bit of positive news amidst the generally gloomy financial picture.

Rakuten Group Financial Update

• Financial Performance: Over the past few years, Rakuten has experienced significant financial challenges. In FY2020, their revenue was 1,455,538 million yen, but they faced an operating loss of 93,849 million yen. This trend of increasing revenue but significant operating losses continued in FY2021 and FY2022. For instance, in FY2022, despite a revenue of 1,920,894 million yen, the operating loss deepened to 371,612 million yen. This pattern indicates a growing revenue stream but challenges in achieving operational profitability.

• Mobile Segment Performance: In Q1 FY2023, the Mobile segment recorded a 25.7% year-on-year increase in revenue, reaching 96.3 billion yen, but suffered non-GAAP operating losses of 102.7 billion yen. However, in Q2 FY2023, the Mobile segment showed signs of improvement. Although the segment's revenue was slightly down by 0.9% YoY, the Non-GAAP operating losses reduced significantly to 824 million yen, marking an improvement of 391 million yen compared to the previous year. This suggests that while the Mobile segment is still not profitable, it's moving in the right direction with narrowing losses.

• Rakuten Bank Selloff: Rakuten Bank's IPO in April 2023 valued it at 322.2 billion yen. The bank saw an 11.6% year-on-year increase in individual customer accounts and a 17.6% increase in total balance of deposits. As the overall stock market is more bullish than the at the start of the year, and Rakuten Inc. is now planning to sell an even bigger stake in Rakuten Bank (an additional 15%, or 60.6 billion yen) and its Rakuten Card division. This will be a much-needed cash infusion for the company.

Interesting Aspects of Rakuten Stock

• Debt Maturity Risk: Rakuten's debt maturity profile remains a critical concern. As of FY2022, the company reported an operating loss of 371,612 million yen, reflecting significant financial pressures. With substantial debt maturing in the next few years, the company’s ability to manage this debt will be crucial.

• Asset Monetization Efforts: Rakuten is actively working on monetizing its assets to address its debt situation. The sale of a stake in Rakuten Bank is part of this strategy. The success of these monetization efforts will be key in determining the company's ability to manage its debt burden. As noted earlier, even though Rakuten keeps operating at a loss, the debt burden is, and will likely continue to go down due to the selloff of its banking and credit card division.

  

• Mobile Segment's Future: Despite the current losses in the Mobile segment, there's a trend of improvement. The challenge for Rakuten will be to continue this trend and turn this segment into a profitable venture.

  

Updated KonichiValue Score: Hold

Why 'Hold'?

• Debt Moves: Rakuten's been smart selling part of Rakuten Bank, which is a big deal considering their JPY797 billion debt mountain. This could really help lighten their load.

• Mobile Getting Better: The Mobile division's still not making money, but it's losing less than before – losses shrunk by 39.1-billion-yen YoY. That's a step in the right direction.

• Bank and Securities on the Rise: Rakuten Bank and Rakuten Securities are doing well. More customer accounts, more deposits – signs they're growing and doing something right.

• Stock's Still Down Though: Despite these good bits, the stock's down by about 11% since January. Seems like the market's still waiting to see more before getting excited.

Bottom Line:

Rakuten's got some good stuff happening, especially with less loss in mobile and growth in financial services. But the big debt and the stock's dip mean we're not out of the woods yet. So, for now, it's a 'Hold' – keep an eye on them, but maybe hold off on buying more shares until things look a bit more solid.