Rakuten's Q1 Loss: Contrarian Buy or Structural Red Flag?
18min read The Rakuten Group’s Q1 FY2025 loss of ¥305 million sent its stock reeling, but beneath the headlines lies a complex story of strategic trade-offs and valuation disconnects. Is this a fleeting stumble—or a warning sign of deeper trouble? Let’s dissect the numbers.
The Loss: One-Time Costs vs. Structural Weakness
Rakuten’s reported loss is a mix of temporary operational challenges and non-recurring expenses, not a collapse of its core businesses. The Mobile segment, which now accounts for 20% of revenue, reduced its operating loss by ¥14.3 billion YoY to ¥51.3 billion, driven by its first-ever EBITDA profitability (¥102 million) excluding property taxes. This milestone signals progress toward its 2025 target of full-year EBITDA breakeven.
The bulk of the loss stemmed from:
1. Write-downs and legal costs: A ¥2.459 billion fee to terminate a domestic sports business agreement and provisions for liabilities tied to a sold subsidiary.
2. IFRS adjustments: Amortization of intangible assets (¥1.365 billion) and share-based compensation (¥4.382 billion) skewed reported results.
Crucial Context: Rakuten’s Mobile division is a long-term bet. Capital expenditures for infrastructure will continue to weigh on near-term profits, but its 8.63 million subscribers (up 19% YoY) and industry-leading ARPU (¥2,827) suggest it’s turning a corner.
Valuation: Cheap or Just Complicated?
Rakuten’s stock has fallen 15% year-to-date, but its valuation metrics scream opportunity:
- EV/EBITDA of 9.12 is well below peers like Revolut (45x P/E) and even Alibaba (16.7x P/E).
- Free cash flow yield of 58% and a net cash position of ¥998.15 billion (¥462 per share) underscore financial resilience.
- Its current P/E of -10.79 is even 38% below its 5-year average of -8.41, implying the market is pricing in a prolonged slump.
Compare this to Rakuten’s peers:
- Revolut trades at 45x P/E despite its 72% revenue growth, while Rakuten’s core businesses (e-commerce, fintech) are growing at 9%+ annually.
- Alibaba’s EV/EBITDA of 6.44x isn’t far off Rakuten’s 9.12, yet its stock trades at a higher premium.
Growth Markets: Southeast Asia and Europe
Rakuten’s international expansion is a key lever for future growth:
- The International segment (including Europe) grew 8.5% YoY to $2.04 billion, with its first-ever annual profitability.
- In Southeast Asia, its Fillr and cross-border e-commerce platforms drove a profit jump of $10.4 million YoY in 2024, while Europe’s Rakuten France and Viber are stabilizing.
The Asia-Pacific affiliate market, where Rakuten operates, is projected to grow at an 11% CAGR through 2031, fueled by e-commerce and digital services—a tailwind Rakuten is positioned to exploit.
Risks and the Bear Case
Bears will point to:
1. High debt: Rakuten’s debt-to-equity ratio of 4.41 remains elevated.
2. Margin pressures: Gross margins are still negative (-1.08%), though FCF margins hit 48.57%.
3. Mobile dependency: The segment’s capital needs could divert funds from other growth areas.
Conclusion: Buy the Dip—But Watch the Debt
The Q1 loss is a paper cut, not a mortal wound. Rakuten’s core e-commerce and fintech businesses are healthy, its Mobile division is on track, and its valuation is deeply undervalued relative to its growth trajectory. The stock’s dip reflects short-term noise, not a death spiral.
Investment thesis:
- Buy: The current valuation offers a rare chance to own a cash-rich, ecosystem-driven tech conglomerate at 9x EV/EBITDA.
- Hold: If Rakuten’s debt rises further or Mobile’s EBITDA misses targets.
The contrarian play here is clear: Rakuten’s losses are temporary, its growth is real, and its valuation is a steal.
Final caveat: Monitor Rakuten’s debt management and Mobile’s EBITDA progress. If the latter hits full-year breakeven in 2025, this stock could surge.
