Shares of Webtoon Entertainment Inc. (NASDAQ:WBTN) have seen modest returns after the business went public. The comic storytelling platform went public at the higher end of the public offering, followed by modest gains on the first day of trading.
Webtoon is an interesting and niche platform with a loyal following. The company trades at a modest sales multiple in relation to other platform companies, although that its margins potential seems more limited.
Trying to learn more about the business, I am unwilling to commit to the shares here, but willing to keep an eye on the business and shares from here.
A Storytelling Platform
Webtoon aims to be the world’s storytelling technology platform which aims to empower creation by anyone, for everyone. The company was founded by founder and current CEO Junkoo Kim who launched the project as a side project two decades ago.
The idea was to bring comic to the world, in a borderless world in which creators were not limited by print or borders. Certainly, comics have the potential to provide a window into other worlds, transporting readers to new places and worlds.
Webtoon has been created for creators and while many stories are free, some are paid for as well, allowing creators to make a living, or generate side-income from their creations. While users pay just pennies per story, the creators have been able to make ten thousands from their efforts, with some generating millions per annum.
The global community now totals 170 million members across 150 countries, which are enjoying the content made by some 24 million creators. These members in total have been paid over $2.8 billion since inception, with average users easily spending half an hour per day on the platform.
Valuation & IPO Thoughts
Webtoon aimed to sell 15 million shares in a preliminary pricing range between $18 and $21 per share, with final pricing set at the higher end of the range. Subsequently, the company raised some $315 million in gross proceeds from the offering. An interesting fact, BlackRock indicated its willingness to buy $50 million in shares in the offering.
With a total share count of just over 127 million shares following the offering, the company obtained a $2.67 billion equity valuation. This includes a more than $200 million net cash position ahead of the offering, and likely around a half a billion net cash positions post the offering. This implies that operating assets are valued at around $2.2 billion.
For the year 2022, the company generated $1.08 billion in revenues, a huge amount. Unfortunately, margins did not paint such a pretty picture with cost of revenues equal to 75% of sales, mostly paid out to content creators. After marketing and G&A expenses, operating losses were reported at $115 million. Just over half these sales were generated in Korea, about a third in Japan, and just over a tenth in the rest of the world.
In the year 2023, the company grew its full-year sales by 19% to $1.28 billion. Amidst strong cost control, the company reduced operating losses to $36 million. For the first quarter of 2024, the company posted a mere 5% increase in first quarter sales to nearly $327 million. Promising is that the company managed to post GAAP operating profit of $14 million, the first quarterly earnings number (at least over the past two years) as the S1-filing details do not go back in time further.
With a $2.2 billion valuation, the company is valued at less than 2 times sales, as growth slowed down quite a bit. While the company did manage to post a small operating profit in the first quarter, it is difficult to see what the true run rate in terms of profitability of the business is.
Shares of Webtoon have risen to the $23 mark in the days following the offering, adding about a quarter of a billion to the valuation, pushing up the enterprise valuation to around $2.5 billion. This values the business at around 2 times sales and about 40–50 times annualized operating profits here, although these are quite volatile. Furthermore, the first quarter results are difficult to read into, being the first quarterly profit reported by the business here.
Concluding Thoughts
There are quite some risks by investing in platforms. What I like about this business is that Webtoon has a large and loyal following, which are sometimes obsessed with the comics and are willing to pay for these services.
That is the positive and while the Webtoon Entertainment Inc. revenue base is big, I am mindful of the slower growth as well, although the good news is that margins have turned positive here. This comes as the business still generates the vast majority from content revenues, accompanies by smaller advertising and IP Adaption revenues as well.
Other risks outside the popularity and the valuation (in terms of earnings multiples) is that the platform relies heavily on Korea and Japan, responsible for the vast majority in terms of sales. This creates concentration risks, but also currency conversion risks, as the company reports in US dollars.
Competition is also a risk, perhaps not as much competition from similar platforms, but the simple competition for time and attention, in which the company competes with the daily tasks of consumers across the globe, but moreover with social media, gaming, and alike. Other general risks include the reliance on storage and distribution partners such as Amazon AWS, as well as NAVER cloud and Google, among others.
Amidst all this, I am curious to get to learn more about the platform and growth trajectory before making up a largely neutral stance here. As somewhat of a unique platform, I recognize the low sales multiples, yet continued growth and real margin expansion is what is needed to create appeal here.
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