• By
  • Min-Jeong Lee

The popularity of mobile chat app Line has boosted the stock price of its operator Naver Corp. more than threefold in the year to date, though some analysts remain skeptical amid the rave reviews.

A graphic showing the expansion in Line’s user base in a little over two years.
Naver Corp.

Latest local media and brokerage reports have been filled with headlines that paint a rosy picture for Naver, which is based in South Korea but whose app gained popularity in Japan. The Internet portal has long been likened to Google Inc. locally, but it barely had any presence overseas before Line.

Most analysts have been very generous in their assessment of the company’s growth potential given its successful expansion overseas. Kiwoom Securities, a local brokerage, went as far as saying that Line has the potential to grow into a mobile platform that will compete with the likes of Google and Apple Inc. in the future. Naver posted a consolidated net profit of 76.2 billion won ($72.4 million) on revenue of 585.3 billion won for the quarter ended September 30.

So, is it time to put more money on Naver?

Sean Lee, an analyst with Citi Research says no, reaffirming its “Sell” rating on the stock in a report published this week. His basic argument is that a high subscription rate doesn’t equal profit growth.

“No matter how many subs an [instant messaging service] secures in a country, it is hard to monetize efforts if it is not in a dominant position,” Mr. Lee wrote, adding that he doesn’t expect to see meaningful monetization in countries other than Japan, Taiwan and Thailand.

Mr. Lee argues that messaging services aren’t an attractive advertising platform in general because they focus on connection and don’t generate their own unique content. This contrasts with social-networking platforms like Facebook, where sharing content is a key part of the service.

Advertisements on chat apps haven’t taken hold because most users tend to view in-app ads as a nuisance. WhatsApp, which is widely used in Europe, is well-known for its no-ads policy and makes money by charging its users.

Line and competitor Kakao Talk are downloadable for free, so the big challenge for the apps’ operators is how to spin profits from their popularity. Kakao has found a way around this issue by releasing games through its platform and it currently relies heavily on gaming money for profits. 

Citi’s Mr. Lee, referring to Kakao, says that “the only business model that has proven to be successful so far on the [instant messaging] platform is the game publishing/channeling model.”

Citi has a target price of 290,000 won a share for Naver. Thursday morning in Asia, Naver’s share price was up 2.8% at 730,000 won. 

Line has shown substantial growth in the past few months, with the number of subscribers more than doubling to 300 million. Kakao Talk has over 100 million accumulated users. WeChat, which is most actively used in China, is estimated to have over 400 million users.