WEBTOON (WBTN)

Digital storytelling platform WEBTOON (NASDAQ:WBTN) fell short of the market’s revenue expectations in Q1 CY2025, with sales flat year on year at $325.7 million. On the other hand, the company expects next quarter’s revenue to be around $340 million, close to analysts’ estimates. Its GAAP loss of $0.17 per share was 7% below analysts’ consensus estimates.

Company Overview

Pioneering a vertical-scrolling format optimized for mobile devices, WEBTOON Entertainment (NASDAQ:WBTN) operates a global platform where creators publish serialized web-comics and web-novels that users can read in bite-sized episodes.

AI-driven content creation, personalized media experiences, and digital advertising are evolving, which could benefit companies investing in these themes. For example, companies with a portfolio of licensed visual content or platforms facilitating direct monetization models could see increased demand for years. On the other hand, headwinds include growing regulatory scrutiny on AI-generated content, with many publishers balking at anything that gets no human oversight. Additional areas to navigate include the phasing out of third-party cookies, which could make traditional ways of tracking the online behavior of consumers (a secret sauce in digital marketing) much less effective.

WEBTOON's competitors include Kakao Webtoon and Kidari Studio in Korea, Piccoma and Jump Toon in Japan, and Tapas and Manta in the U.S. In the web-novel space, it competes with KakaoPage and RIDI in Korea, and Radish, GoodNovel, and Dreame in the U.S. More broadly, WEBTOON competes for user attention with social media platforms like TikTok and Instagram, streaming services like Netflix, and gaming companies.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $1.35 billion in revenue over the past 12 months, WEBTOON is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.

As you can see below, WEBTOON grew its sales at a solid 7.9% compounded annual growth rate over the last two years. This is an encouraging starting point for our analysis because it shows WEBTOON’s demand was higher than many business services companies.

This quarter, WEBTOON missed Wall Street’s estimates and reported a rather uninspiring 0.3% year-on-year revenue decline, generating $325.7 million of revenue. Company management is currently guiding for a 5.9% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 13% over the next 12 months, an improvement versus the last two years. This projection is noteworthy and indicates its newer products and services will fuel better top-line performance.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

WEBTOON’s operating margin has been trending down over the last 12 months and averaged negative 6.9% over the last three years. Unprofitable, high-growth companies warrant extra scrutiny, especially if their margins fall because they’re spending loads of money to stay relevant, an unsustainable practice.

This quarter, WEBTOON generated a negative 8.2% operating margin.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

WEBTOON broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

WEBTOON burned through $19.19 million of cash in Q1, equivalent to a negative 5.9% margin. The company’s cash flow turned negative after being positive in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Companies with more cash than debt have lower bankruptcy risk.

WEBTOON is a well-capitalized company with $550.1 million of cash and $19.81 million of debt on its balance sheet. This $530.3 million net cash position is 42.7% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We struggled to find many positives in these results as its revenue and EPS missed. Next quarter's EBITDA guidance also fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 6.6% to $9.22 immediately after reporting.

Updated: May 22, 2025 at 11:39 PM EDT

Before investing in or passing on WEBTOON, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

WEBTOON isn’t a bad business, but we have other favorites. First off, its revenue growth was solid over the last two years and is expected to accelerate over the next 12 months. And while WEBTOON’s declining EPS over the last one years makes it a less attractive asset to the public markets, its projected EPS for the next year implies the company’s fundamentals will improve.

WEBTOON’s EV-to-EBITDA ratio based on the next 12 months is 21x. Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $12.50 on the company (compared to the current share price of $8.92).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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