Line Corp (ADR): 5 Reasons to Avoid LN Stock

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Line Corp - Line Corp (ADR): 5 Reasons to Avoid LN Stock

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Respected Canadian money manager Stephen Jarislowsky once wrote that most new issues can be purchased 12-24 months after going public for less than the IPO price. When it comes to buying Line Corp (ADR) (LN) or any other IPO, Jarislowsky is an unabashed bear.

Line Corp (ADR): 5 Reasons to Avoid LN StockThe billionaire has got a lot of company when it comes to being bearish about IPOs. Ben Graham, Burton Malkiel, Jeremy Siegel, Jason Zweig and many others have written about the pitfalls of IPOs.

Yet investors lined up July 14 to buy Line at the $32.84 offering price and ultimately pushing LN stock to $41.58 by the end of the messaging app’s first day of trading; a 27% gain for those able to get their hands on its stock prior to trading.

Since then it has fallen back to trade below $37 and is now around $38. Time to buy? No, but not just because some of the smartest minds in financial circles think IPOs are a waste of time.

Here are five reasons to avoid Line stock.

It Barely Makes Money: Its adjusted EBITDA in 2015 was $150 million on $1.1 billion in revenue. That’s not a bad EBITDA margin, mind you, but it’s certainly not in the same league as tech stalwarts Facebook Inc (FB) and Alphabet Inc (GOOG, GOOGL) at 48% and 33% respectively. Yes, you can argue that its first quarter results ended March 31 — adjusted EBITDA of $78 million — suggests EBITDA margins could challenge 30% by the end of 2016. That said, it has got a lot of moving parts as it expands its offerings in its main markets of Japan, Taiwan, Thailand and Indonesia. Its costs will surely rise as it tries to be more than a one-trick pony in Southeast Asia.

You Can Buy Facebook for Less: As of July 19, Line had a market cap of $7.2 billion, a multiple of 48 times EBITDA. Facebook, which is actually growing faster than Line in terms of monthly active users — the latest three-month period saw Line increase MAUs by 3.3% on a sequential basis compared to 4% for Facebook — yet you can buy FB stock for just 38 times EBITDA. With Facebook, you get two apps, not one, for less than Line, and you also get everything else it brings to the table. With the markets looking fairly priced, if not a tad expensive, I think you’ve got to use discretion here and opt for old reliable.

Too Regional: Line has 218 million MAUs, of which 61 million are in Japan; another 91 million in Taiwan, Thailand and Indonesia; and the remaining 66 million from more than 230 other countries around the world. While Line is the biggest messaging app in both Thailand and Turkmenistan and one of the biggest in Taiwan and Indonesia, there’s no question Japan is the driving force of its business, responsible for 71% of its 2015 revenue. If Japan falters, Line’s got a problem.

Stickers: Are You Kidding Me? Line generated 24% of its revenue (more than $270 million) in 2015 selling stickers to its MAUs who use them in messages much like emojis. These stickers can cost as much as $6 each while most sets run between $2-3 dollars. This reminds me of the Candy Crush Saga game. Eventually, people will grow tired of forking over cash for cute little characters. How do I know? Just look at its sticker revenue for the last three years. They grew 109% year-over-year from 2013 to 2014 but only 39% between 2014 and 2015. In Q1 2016, the increase shrunk to 15%. Revenues from stickers over the past three years has remained around the 24% mark.

Biggest IPO of the Year: it’s been a terrible year for IPOs, with just 45 priced through July 19, a 60% decrease from the same time last year and the lowest number since 2008. Line’s IPO is certainly a breath of fresh air. Only the third IPO to raise $1 billion or more in 2016, it’s also by far the largest tech IPO of the year and the biggest since Alibaba Group Holding Ltd (BABA) in September 2014. That’s a lot to live up to … maybe too much.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2016/07/five-reasons-to-avoid-line-corp-stock/.

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