From Banking to Travel, Rakuten Taps into e-Commerce in Japan

08/20/2019 5:00 am EST

Focus: TECHNOLOGY

Carl Delfeld

editor, Cabot Emerging Markets Investor

With markets a bit on edge as U.S.-China tensions rise, it makes sense to move to a high-quality, conservative play that is in an uptrend with plenty of upside potential, suggests international investing expert Carl Delfeld, editor of Cabot Global Stocks Explorer.

Rakuten (RKUNY) is a well-diversified conglomerate with tentacles throughout Japan that has plenty of running room for international expansion.

Many of you may not have heard of Rakuten but I assure you that very few Japanese are not part of its ecosystem in multiple ways.

Its loyalty membership program is more than 100 million strong and it is Japan’s #1 internet bank, #1 credit card and one of the country’s leading travel platforms.

Rakuten’s core business is as an internet sales platform akin to Amazon. The company’s market share in Japan is about 25% — roughly equal to Amazon’s market share. Next comes Yahoo Japan at around 15%.

Recently, Rakuten’s early investment in Lyft (13% of shares) has bolstered earnings, and it has a strategic alliance with Wal-Mart.

Rakuten already has a large number of e-commerce cloud sites built with high-speed fiber connections in Japan. This offers RKUNY natural expansion capabilities into virtual mobile networks and 5G. If successful, this investment will put RKUNY in a strong position in Japanese telecoms.

Building a 5G network would typically involve huge investments. Luckily, RKUNY can bypass this because of its existing infrastructure in Japan.

Rakuten is a growth conglomerate with multiple drivers and a sterling balance sheet with cash and short-term investments worth roughly $12.5 billion.

And the stock is trading at just 10 times trailing earnings, booked a 16% increase in revenue during its latest quarter, and offers an impressive 30% return on equity. For now, we recommending buying half of one's expected full position in this stock.

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