Korea Investment & Securities Co. said on the 24th that for Kakao(035720), which recently decided on a spin-off, the upward trajectory of future corporate value depends on how successfully it solves the tasks it set for itself. It maintained a Buy rating and a target price of 60,000 won. Kakao's previous closing price was 35,800 won.
On the 21st, Kakao said it resolved to carry out a spin-off into KakaoX (surviving company) and KakaoAI (new company). KakaoAI's main purpose is to create new revenue sources by organically combining artificial intelligence (AI) with existing businesses, based on Talk Biz, which handles ads and commerce on KakaoTalk. KakaoX, the surviving entity, aims to raise corporate value by fostering growth of core subsidiaries such as fintech, mobility, and content, and to discover new businesses by using investment resources.
The split ratio is KakaoX 0.64 to KakaoAI 0.36. This was calculated based on the two corporations' net worth of 5.1 trillion won and 2.9 trillion won.
Jeong Ho-yoon, an analyst at Korea Investment & Securities Co., said, "Kakao said through this announcement that the purpose of the spin-off is to resolve the undervaluation Kakao faces as a conglomerate and to address the resulting inefficient decision-making and resource allocation."
However, Korea Investment & Securities Co. said Kakao's problems will not be solved by the split alone.
Jeong said, "Based on Kakao's projected operating profit for this year, the price-earnings ratios (PER) of KakaoAI and KakaoX, calculated by estimating net profit, are about 28 times for KakaoX and 13 times for KakaoAI," adding, "In simple valuation terms, KakaoAI faces less burden, but its main businesses of advertising and commerce are unlikely to command high valuations due to low domestic growth, and in the case of KakaoX, while the valuation is relatively high, its post-split revenue growth rate is 13% CAGR based on guidance, which could create valuation overhang risk."
In the end, after the spin-off, what matters for an upward trajectory in corporate value is how successfully Kakao can solve the tasks it has set for itself.
Domestic software corporations have business structures based on the domestic market and, as a result, have experienced a prolonged slowdown in revenue growth and a decline in valuations since COVID-19.
Jeong said, "The market expects AI to be the solution to this situation, and Kakao presented monetizing AI services, rather than investing in data centers, as its growth strategy," adding, "After the KakaoAI split, valuation pressure may be limited, but for the share price to rise, it needs to show that AI monetization is being realized."
He also said that in the case of KakaoX, given its low revenue growth relative to its high valuation, it needs to demonstrate that it can actually achieve rapid revenue growth by using its cash holdings efficiently.