Kakao stock rating upgraded to Buy at UBS on improving fundamentals

UBS upgraded Kakao Corp. to Buy, raising its price target to KRW73,000, citing improving fundamentals and early signs of revenue recovery. The South Korean internet giant reported a Q2 operating profit of Won186 billion, a 39% year-over-year increase that significantly surpassed consensus estimates, driven by profitability enhancements at subsidiaries like Piccoma and SM Entertainment. UBS anticipates revenue growth to reaccelerate from Q3, initially led by subsidiaries and later by core advertising in Q4 following a messenger app revamp, with long-term growth potential from AI initiatives launching in H2 2025.

Analysis

UBS has upgraded Kakao Corp. to Buy from Neutral and significantly raised its price target to KRW73,000 from KRW45,000, signaling strong conviction in the company's turnaround. This upgrade is underpinned by a robust second-quarter performance where operating profit surged 39% year-over-year to Won186 billion, substantially outperforming the consensus estimate of Won126 billion. The earnings beat was not driven by the core business, where revenue remained flat, but by profitability improvements at its subsidiaries, namely marketing optimization at Piccoma and margin expansion at SM Entertainment. The forward-looking thesis anticipates a sequential revenue reacceleration, beginning with subsidiary growth in the third quarter and followed by a revival in the core advertising business in the fourth quarter, contingent upon a successful messenger app revamp in September. While the stock's valuation is not considered cheap, UBS identifies long-term growth potential from artificial intelligence initiatives slated for launch in the second half of 2025.

Key Decisions for Investors

• Investors should consider the positive catalysts of a substantial earnings beat and a significant price target upgrade as a basis for a bullish stance, supported by an expected revenue reacceleration in the second half of the year.
• It is critical to monitor Kakao's Q3 results for confirmation of subsidiary-led growth and the Q4 performance of its core advertising business following the September messenger app update, as these are the key near-term drivers.
• While the outlook is positive, investors should be mindful that the current valuation is not considered cheap and that the long-term growth narrative hinges on AI initiatives that are still over a year away from launch.