[DigitalToday reporter Ho-jung Lee] Brokerages are forecasting record first-quarter results for Naver and Kakao, but their shares are continuing to fall. Analysts say valuation expectations are declining as visibility on monetising artificial intelligence (AI) weakens.

The Korea Exchange said on April 23 that Naver and Kakao shares are down 11.75 percent and 19.38 percent, respectively, so far this year. That contrasts with a sharp rise in the KOSPI and gains in shares of major companies over the same period.

This month, brokerage reports cutting target prices have also continued. For Naver, Samsung Securities (330,000 won to 260,000 won), Shinhan Investment Corp (270,000 won to 240,000 won) and DS Investment & Securities (400,000 won to 300,000 won) lowered their targets. For Kakao, Samsung Securities (73,000 won to 59,000 won), Shinhan Investment Corp (80,000 won to 75,000 won) and DS Investment & Securities (75,000 won to 65,000 won) also cut targets.

Naver: Higher costs, merger delays weigh on valuation

Naver's weak share performance is seen as the result of rising costs and uncertainty over new businesses acting at the same time. Commerce revenue continues to post strong growth on a spillover benefit from issues surrounding Coupang that began late last year and the effect of higher Smart Store fees, but profitability is being pressured by a sharp rise in infrastructure costs due to increased GPU purchases and higher commerce promotion expenses.

Hyo-jin Lee (이효진), a researcher at Meritz Securities, said, "This is currently a momentum vacuum." She added, "To improve relative attractiveness, a cost-cutting plan is needed to offset capital expenditure (CAPEX)." Yu-jin Sun (선유진), a researcher at LS Securities, also analysed that this year results will be driven by core advertising and commerce rather than new-business momentum, and that synergies from virtual asset-related businesses can be expected from next year.

A blockchain new business cited as the next growth engine is also being delayed. A merger between Naver Financial and Dunamu has been pushed back from June to September as delays in legislating the Digital Asset Basic Act coincide with a postponement of the Fair Trade Commission's schedule for reviewing the business combination.

Seung-ho Choi (최승호), a researcher at DS Investment & Securities, assessed that "risks around the merger itself are also increasing as differences between the National Assembly and financial authorities over limits on major shareholder stakes in virtual asset exchanges have not narrowed."

Kakao: TalkBiz holds up, but proving AI utility is a task

Kakao's TalkBiz advertising and platform core businesses such as mobility and Kakao Pay are supporting results, but two tasks are holding back the shares: turning KakaoTalk into a super app and proving the utility of AI agents. "Kanana in KakaoTalk", officially launched in March, is expanding integration with partners such as Olive Young, Musinsa and Hyundai Department Store, but the assessment is that time is needed before it leads to increased user traffic.

Dong-hwan Oh (오동환), a researcher at Samsung Securities, said, "Since the impact of introducing AI agents is minimal, presenting a new growth engine is needed for a valuation rebound."

Seung-ho Choi, a researcher at DS Investment & Securities, said, "Kakao, given the nature of messaging, does not have overlapping interests with AI chatbots, so it is not an industry that needs to consider AI de-rating as much as competitors." He added, "For KakaoTalk to grow to another level, it needs to evolve from a chat app into a super app, but it is facing a very difficult challenge of having to change consumer behaviour patterns."

Conditions for a rebound are clearer AI profitability

Brokerages cite tangible monetisation of AI services as a common condition for a rebound in both companies' shares. For Naver, the key question is whether the 'AI Tab', set for release in the second quarter, will lead to higher traffic and expanded advertising revenue through linkage with core services such as commerce and search. Seung-ho Choi, a researcher at DS Investment & Securities, said, "In the end, Naver's core business value lies in commerce and crypto." He added, "Commerce will become a new growth engine with the inclusion of the WallaPop connection and high growth at Poshmark."

For Kakao, key tasks are adding at least 3 more global partnerships in the first half and expanding the user base for Kanana in KakaoTalk. Seok-oh Kang (강석오), a researcher at Shinhan Investment Corp, said, "As results improve faster due to growth in TalkBiz, which has a high contribution to profit, the share price can rebound flexibly if the attraction of large business operators that will join AI agents proceeds smoothly."

For both companies, the current phase in which the gap between results and share prices persists means the market has removed the past 'growth stock premium' and has entered a stage of specifically verifying whether AI can be monetised.

Naver will announce its first-quarter results on April 30, and Kakao will do so on May 7.