Rakuten's Q3 Earnings and Strategic Shifts as a Potential Inflection Point

The Rakuten Group's Q3 FY2024 earnings report, released on November 13, 2024, has sparked renewed interest in the company's long-term potential. For the first time in five years, the group reported Non-GAAP operating income of 12.3 billion yen, a stark contrast to the sustained losses that defined its earlier years of aggressive expansion. This return to profitability, coupled with strategic shifts in AI integration and ecosystem-driven growth, raises a critical question: Does this represent a durable inflection point for Rakuten, or a temporary rebound in a volatile market?

Profitability Progress: A Hard-Won Milestone

Rakuten's Q3 results reflect a disciplined pivot toward profitability after years of capital-intensive investments, particularly in its Mobile Network Operator (MNO) business. Consolidated revenue hit 566.7 billion yen, up 9.3% year-on-year, with all three core segments—Internet Services, FinTech, and Mobile—contributing to growth. The FinTech segment was a standout, generating 208.2 billion yen in revenue (up 12.8% YoY) and 40 billion yen in Non-GAAP operating income (up 57.2% YoY). Rakuten Card's shopping gross transaction value (GTV) reached 6.0 trillion yen, a first for the quarter, driven by a 12.7% YoY increase in customer spending.

The Mobile segment, while still reporting a Non-GAAP operating loss of 50.6 billion yen, showed significant improvement: a 20 billion yen reduction in losses YoY and a 24.1 billion yen increase in EBITDA. This progress was fueled by subscriber growth (8.12 million as of November 10, 2024) and a 30.3% YoY revenue increase for Rakuten Mobile. Crucially, the company raised 170 billion yen through the sale and leaseback of mobile network assets, improving liquidity and enabling debt reduction.

AI and Ecosystem Expansion: The New Growth Engine

Rakuten's strategic focus on AI and ecosystem integration is reshaping its competitive landscape. The company reduced customer support costs by 30% through AI-powered automation, a key efficiency gain under its “Triple 20” initiative targeting 20% productivity improvements. The launch of Rakuten Link AI, a generative AI chat service accessible without additional subscriptions, signals a bold move to embed AI into everyday user experiences. This aligns with broader trends in AI adoption, where companies like Microsoft and Google are leveraging AI to enhance customer engagement and operational efficiency.

The ecosystem strategy—linking mobile, e-commerce, and financial services—has also proven effective. Rakuten's cross-selling initiatives, such as the Saikyo Senior Program, have driven subscriber acquisition and increased average revenue per user (ARPU). For instance, MNO ARPU rose to 2,801 yen, driven by 5G adoption and higher data usage. Meanwhile, Rakuten Bank's customer base grew to 16.19 million (up 12.6% YoY), and Rakuten Payment maintained its leadership in QR code payment satisfaction, underscoring the ecosystem's ability to retain users across touchpoints.

Risk Factors: Sustaining the Momentum

Despite these positives, investors must weigh several risks. The Mobile segment remains unprofitable, with Non-GAAP operating losses of 50.6 billion yen in Q3. While the company has improved efficiency, the telecom sector is highly competitive, with rivals like SoftBank and NTT Docomo investing heavily in 5G and AI. Additionally, Japan's economic environment—marked by low inflation and cautious consumer spending—could temper growth in e-commerce and fintech.

Global macroeconomic risks, including interest rate volatility and geopolitical tensions, also pose challenges. Rakuten's debt reduction efforts are critical, but its leverage ratio remains elevated. The company's reliance on AI-driven efficiency gains is promising, but execution risks persist. For example, AI tools must deliver consistent user value to justify long-term investment.

Investment Thesis: A Calculated Bet

Rakuten's Q3 results suggest a company in transition. The return to profitability, combined with AI and ecosystem-driven growth, positions it to capitalize on Japan's digital transformation. However, the path to sustained success hinges on three factors:
1. Continued cost optimization in the Mobile segment to reduce losses.
2. Scalability of AI initiatives to maintain customer retention and operational efficiency.
3. Strategic partnerships, such as the Mizuho Financial Group alliance, to expand its FinTech ecosystem.

For long-term investors, Rakuten offers a compelling mix of innovation and resilience. While the stock may remain volatile due to macroeconomic headwinds, the company's focus on AI and ecosystem integration aligns with global trends. A cautious but optimistic approach—targeting entry points during market corrections—could reward those who recognize the inflection point.

In conclusion, Rakuten's Q3 earnings and strategic shifts warrant renewed attention. The company has demonstrated the ability to balance growth and profitability, but execution will be key. For investors willing to navigate near-term risks, Rakuten's ecosystem-driven model and AI ambitions present a unique opportunity in Japan's evolving digital economy.