Yahoo! JAPAN (PINK:YAHOY) is one of the largest Internet companies in Japan with a highly diversified product portfolio which includes search, a mobile platform and eCommerce. The company generated approximately JPY 300 billion ($3.5 billion) during 2012 with company wide gross margins of approximately 90%. We expect revenue growth to be slow and gross margins to stay relatively flat since Yahoo! JAPAN is a mature company and will likely be able to maintain its position in most of the markets it operates in.
Yahoo! JAPAN has a relatively diversified business, with its three largest operating segments contributing around 17% of its total value. We think that the firm’s growth will come from mobile advertising over the next few years as users substitute PCs for mobile devices for much of their content consumption.
Mobile Advertising Platform Key For Growth
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According to our estimates, mobile advertising contributes approximately 17% to Yahoo! JAPAN’s total value, even though it made up for only around 7% of advertising revenues in 2012. We think that this division will be the biggest growth driver for Yahoo! JAPAN and estimate that around 15% of total revenues will be come from mobile advertising by 2015.
In our opinion, the primary growth driver in mobile ad revenues will be the increase in the number of page views on Yahoo! JAPAN’s mobile ad platform. We think that monthly page views per unique visitor will increase from around 250 to approximately 550. This growth will be driven by an increase in smartphone penetration in Japan, which currently stands at a surprisingly low 15%. As this figure increases, more users will access web services via mobile phones and is a trend that will benefit Yahoo! JAPAN.
Another factor which will drive mobile ad revenues is the increase in mobile ad spending expected in the Japanese market. According to research firm eMarketer, mobile ad spending is expected to double and reach $2.6 billion by 2016.  Due to this trend, we expect revenue per 1,000 page views (RPM) to increase from approximately JPY 148 in 2012 to around JPY 215 by the end of our forecast period.
Shopping & Auctions Provide Solid Base
According to our estimates, Yahoo! JAPAN’s eCommerce business is the biggest contributor to its value at around 18%. The division generated total revenues of approximately JPY 60 billion in 2012, and we expect total revenues from this division to increase slowly to around JPY 75 billion by the end of our forecast period.
While Yahoo! JAPAN faces competition in this division from Japanese eCommerce giant Rakuten, we think that the firm will be able to capitalize on the increase in online spending by consumers. According to research firm Forrester, eCommerce sales are expected to grow over 50% from around JPY 4.9 trillion in 2012 to JPY 7.6 trillion in 2015.  This growth will translate to an increase in the transaction value on both Yahoo! Auctions and Shopping, making this segment an important driver of Yahoo! JAPAN’s value.
We currently have a $14 price estimate for Yahoo! JAPAN, which is around 30% above the current market price.Notes: