Revenue growth is solid but margins remain under pressure; AI Factory's profit model remains the key variable

Overview

Naver Corp's 2Q26 revenue was broadly in line with expectations, but profitability was notably below market expectations. Advertising growth slowed, while services, commerce, financial platform, and global opportunities businesses continued to grow. Marketing, partner, and labor costs rose faster than revenue, causing the operating margin to continue declining. Management further explained AI Factory's operating and financing structure, but the analysts believe its long-term economics among revenue attribution, capital investment, and profit sharing still need to be verified.

Core views

First, the revenue side was generally solid, with services revenue, commerce GMV, and AI product user metrics being the main highlights, but advertising revenue grew only 7.5% YoY, indicating some deceleration. Second, growth investments are eroding margins, as marketing activities related to Pay, Webtoons, and merchant migration to N delivery pushed up expenses, and margins are expected to remain under downward pressure in the second half of 2026. Third, AI Factory plans to provide computing power and token services through multiple data center special purpose vehicles, with Brookfield as the main investor and Naver holding minority stakes only when necessary, thereby consolidating token revenue with lower capital investment; however, the minimum return requirements of the special purpose vehicles may compress Naver's sustainable margin. Fourth, AI Tab monthly active users and advertising click-through rate and conversion rate trends are positive, and AI may create incremental revenue for advertising, commerce, and enterprise services, but the scale of monetization still awaits proof from actual contracts and profitability data.

Analysis framework

The report combines company disclosures, FactSet market consensus, and Morgan Stanley forecasts to analyze revenue, expenses, and segment profits on a YoY, QoQ, and expectation-difference basis; valuation uses a sum-of-the-parts approach, separately assessing the core business, Naver Financial, Webtoons, and A-Holdings.

Methodology notes

• Earnings forecastMorgan Stanley ModelWare

  Standardized financial forecasting framework

  Unless otherwise specified, financial metrics are based on the Morgan Stanley ModelWare framework; forecasts are provided by Morgan Stanley Research, and consensus data comes from Refinitiv or FactSet.

• Valuation methodsSum-of-the-parts valuation method

  Aggregate equity value after separately valuing each business

  The core business is valued at 18x 2026 core NOPAT; Naver Financial uses a 3.5x price-to-book ratio; Webtoons is valued based on market value less a 30% holding company discount; A-Holdings is valued based on market value less a 50% holding company discount.

• Relative ratingMorgan Stanley equity rating system

  Risk-adjusted relative return based on industry coverage

  Equal-weight means the stock's risk-adjusted total return over the next 12 to 18 months is expected to be broadly in line with the average of the analyst's industry coverage universe, and is not equivalent to a traditional Hold recommendation.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Naver Corp (035420.KS)

  Core research subject of this report

  Strengths

  Services revenue, commerce GMV, and AI product users are growing rapidly; AI Tab advertising efficiency trends are positive; AI Factory's financing structure is expected to reduce direct capital investment.

  Weaknesses

  Advertising growth has slowed, operating profit was below expectations, marketing, partner, and labor costs continue to rise, and margins are trending downward.

  Comparison

  Relative to market consensus, revenue was 0.5% higher, but operating profit was 8.1% lower; the Equal-weight rating means expected risk-adjusted return is broadly in line with the average of the South Korean telecom and internet coverage universe.

  Risks

  AI investment returns fall short of expectations, the advertising business is disrupted by AI transformation, commerce membership growth slows, and capital expenditure and operating expenses are higher than expected.

• BROOKFIELD CORP (BN)

  Proposed main investor in the AI Factory data center special purpose vehicles

  Strengths

  Can provide external capital for data center construction and help Naver reduce direct capital investment.

  Weaknesses

  Return arrangements of the special purpose vehicles may divert part of AI Factory's economic benefits.

  Comparison

  Brookfield mainly plays an infrastructure capital role, while Naver is responsible for the AI Factory platform, customer services, and token revenue consolidation.

  Risks

  Minimum internal rate of return or other capital return requirements may make it difficult for Naver to achieve the margin targets proposed by management.

• Coupang Inc (CPNG.N)

  Main competitive reference for Naver's commerce business

  Strengths

  Has a mature commerce and delivery system.

  Weaknesses

  If the competitive landscape changes, it may provide room for Naver to expand its commerce share.

  Comparison

  Naver's upside scenario includes continued market share gains from Coupang; the downside scenario includes Coupang's business recovering faster than expected, thereby slowing Naver's membership growth.

  Risks

  Intensified competition may force Naver to increase promotion, delivery, and marketing investments, further depressing margins.

Key data

• 2Q26 revenueKRW 3.389 trillionUp 16.3% YoY and 4.6% QoQ, 0.5% above market expectations.
• 2Q26 operating profitKRW 520 billionDown 0.2% YoY and 3.9% QoQ, 8.1% below market expectations.
• 2Q26 operating margin15.4%17.9% in the same period last year and 16.7% in the previous quarter, mainly affected by rising marketing, partner, and labor costs.
• Advertising revenue growthUp 7.5% YoYAdvertising growth slowed somewhat.
• Services revenue growthUp 31.3% YoYMaintained strong growth momentum.
• SmartStore GMV growthUp 16% YoYCommerce transaction growth accelerated.
• Naver Plus Store app growthUp 35% YoYReflects rapid growth in usage of the standalone commerce app.
• AI Tab monthly active users10 millionRelated advertising click-through rates and conversion rates show positive trends.
• AI Factory data center capacityReach 200MW by 2028Related capacity has been secured, and management aims to achieve margins in the high-teens to up to 20% after full ramp-up.
• Target price and potential upsideW270,000 / 19%Calculated based on the closing price of W226,000 on August 6, 2026.

Impact & implications

In the short term, revenue growth has not yet translated into profit growth, and continued marketing, delivery migration, and AI investments in the second half of 2026 may pressure earnings forecasts and valuation multiples. In the medium term, commerce market share gains, AI product monetization, and AI Factory securing large sales contracts may become new valuation drivers. AI Factory's design of reducing Naver's direct capital expenditure and consolidating token revenue through special purpose vehicles is financially attractive, but return requirements from capital providers such as Brookfield may limit the profit ultimately available to Naver. Therefore, contract size, capacity utilization, and actual margins are more important than nominal revenue growth.

Risks

• AI may disrupt traditional search and advertising models, potentially causing advertising growth to slow further.
• Pay, Webtoons, N delivery merchant migration, and commerce promotion expenses being higher than expected may cause the operating margin to continue declining.
• AI-related capital expenditure, GPU costs, and operating expenses may be higher than expected.
• AI Factory still lacks sufficient large sales contracts and a mature operating track record, and there is uncertainty around its long-term demand, utilization, and profitability.
• Return requirements from special purpose vehicle investors may compress AI Factory profits attributable to Naver.
• Coupang's competitiveness may recover faster than expected, potentially slowing Naver's commerce membership and market share growth.
• Morgan Stanley disclosed that it managed or co-managed a securities offering for Naver Corp and received investment banking compensation in the past 12 months; research users should pay attention to potential conflicts of interest.

What to watch

• Whether the operating margin continues to decline in the second half of 2026, and the growth pace of marketing, partner, and labor expenses.
• Advertising revenue growth, AI Tab user growth, and whether AI advertising click-through rates and conversion rates can continue to improve.
• SmartStore GMV, Naver Plus Store app usage, and changes in commerce market share.
• AI Factory's first major sales contracts, customer structure, token pricing, and capacity utilization.
• Ramp-up pace of the 200MW data center capacity, special purpose vehicle financing terms, and Naver's actual capital investment.
• Whether AI Factory's actual margin after full ramp-up can approach management's target of high-teens to 20%.
• Coupang's competitive dynamics and their impact on Naver's membership growth and promotional expenses.