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Should You Buy Line Corp. (ADR) Below Its IPO Price?

Like Facebook, Line lets users make VoIP calls.

Shares of Line (NYSE: LN) plunged 11% on Jan. 25 after the Japanese messaging app company (owned by Korean internet company Naver ) reported lackluster fourth quarter and full year earnings. Its revenue rose 15% annually to 37.5 billion yen ($330 million), but that missed the consensus estimate of 38.7 billion yen. Line's operating profit more than doubled to 1.6 billion yen ($14 million), but that still missed expectations of 5.34 billion yen.

Like Facebook, Line lets users make VoIP calls.

Image source: Line Corporation.

Now, some good news...

The headline numbers look bleak, but Line's core advertising business remains strong, posting 48% year-over-year growth during the fourth quarter. It also reported "steady growth" in the number of official accounts for its Messenger ads, and that its ad inventory continues to grow. Line's operating margin rose 180 basis points annually to 4.2%, indicating that competition hadn't dented its bottom line growth yet.

Line noted that MAUs for its in-app news portal Line News continues growing -- especially in its four "key countries" of Japan, Taiwan, Thailand, and Indonesia. Line stated that its combined MAUs in those four countries grew 15% annually to 167 million, outpacing its global MAU growth. If Line can widen its moat against Facebook, Tencent, and other rivals in those four markets, it might prevent its MAU growth from turning negative.

To expand its ecosystem as a "monolithic" app like WeChat and Facebook Messenger, Line has been expanding its payment abilities via partnerships with Taiwan's CTBC Bank and Indonesia's Mandiri Bank . It's also added chatbots to its system which enable companies to assist customers via AI-powered replies. Looking ahead, Creator Themes (which let creators sell custom themes instead of simple stickers), new integrated games, overseas expansion efforts, and its baby steps into the mobile virtual network operator (MVNO) space with Line Mobile could all generate new streams of revenue growth.

The verdict: Avoid Line for now

Line has some positive characteristics, but it reminds me too much of another social networking disaster, Twitter (NYSE: TWTR ) . Like Twitter, Line is struggling to grow beyond its niche user base, and it's doubtful that piling on a bunch of new services can help it squeeze out more revenues per user.

Line is holding on to its four key markets for now, but I seriously doubt that it can shield those markets from Facebook, Tencent, and other rivals over the long term. Therefore, I believe that Line isn't a bargain below its IPO price, and could fall even further over the next few quarters.

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Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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