Tokyo-based Kakaku.com Inc. (TSE:2371) is a major Internet conglomerate in Japan. It owns and operates a range of platforms and services, which are categorized into three business segments – Internet Media, New Media/Solutions and Finance. The first two segments contribute to the majority (almost 97% as of fiscal 2019) of the sales, mostly through two company-owned market-leading platforms: Kakaku.com, a shopping support site with a price comparison service, and Tabelog, a restaurant discovery and reservation site. In terms of the revenue model, the company mainly charges performance-based commissions and advertising/promotion fees on the client side and membership fees on the user side.
Two other Internet-related Japanese companies, Digital Garage (TSE:4819) and KDDI (TSE:9433), own 20.4% and 16.7% of Kakaku.com Inc.’s total shares outstanding, respectively. Individual insiders account for a less than 1% of direct ownership, which is not a favorable structure in light of the company’s market cap, in our opinion. We notice that Chairman Kaoru Hayashi does have a sizeable indirect stake through his 14.8% ownership in Digital Garage.
According to the chart below, Kakaku.com Inc. delivered a high and improving return on assets over more than a decade. Its performance for recent years beat the likes of not only its direct competitors in Japan, such as Yahoo Japan (TSE:4689) and Rakuten (TSE:4755), but also global Internet giants such as Alphabet (GOOG) (GOOGL), Amazon (AMZN), Facebook (FB) and Tencent (HKSE:00700). A superior return on assets strongly signals the existence of a durable competitive advantage.
We believe that Kakaku.com Inc. develops its economic moat primarily through the leading brands with scale (Kakaku.com and Tabelog), a two-sided network effect (for Tabelog) and content/data (intangible assets). For example, Tabelog, which was launched in 2005 and is now Japan’s largest restaurant review website, has been accumulating tons of genuine user-generated content (referred to as “UGC”) reviews in Japanese, which represents a considerable challenge for competitors (both local and international) to replicate. As more useful content attracts more users, more restaurant clients get signed up, which, in turn, leads to more content/data/users, creating a profitable cycle.
It appears to us that both Kakaku.com and Tabelog possess a “digital toll bridge” characteristic that requires little capital to scale up. According to Morningstar, the annual CapEx as a percentage of revenue ranged from 2% to 4% for the past decade, during which the top line almost quadrupled.
We do think that the business at Kakaku.com Inc. is sensitive to the macro economy, although the recent-year data tells a bit differently (see below – both the revenue and operating income grew through the global recession in 2008/2009).
To drive growth, the management would like to mainly depend on expansion into adjacent verticals, new product launches and overseas expansion. We see some growth uncertainties here, as the company does not hold a durable core competence outside of the Japanese market or concerning its New Media/Solutions segment. Both of these two initiatives may unnecessarily distract the management. In the meantime, Kakaku.com Inc. also engages in acquisitions and minority investments to expand its business portfolio. However, a laser-focus on return on invested capital (with a target of 40%) could mitigate the risk as the company continues to retain and reinvest a significant portion of its annual free cash flow to seize emerging opportunities from the digitization trend in Japan.
Disclosure: The mention of any stock in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Kakaku.com Inc.
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