Shares of Line (NYSE:LN) rallied 40% over the past 12 months as the messaging app maker generated robust sales growth and held its ground against bigger rivals like Facebook's (NASDAQ:FB) Messenger and WhatsApp. The company recently reported its fourth quarter and full year earnings, revealing that its revenue rose 19% in fiscal 2017, its net profit climbed 16%, and its diluted earnings grew 8%.
That growth was mainly supported by a 40% jump in ad revenues, which accounted for nearly half of Line's top line. However, Line's total monthly active users (MAUs) across its four key markets (Japan, Taiwan, Thailand, and Indonesia) only rose by a million annually to 168 million, compared to the addition of 22 million MAUs in 2016.
That slowdown indicates that Line needs to find new ways to generate more revenue from its existing users, expand its mobile ecosystem, and enter new markets. Fortunately, Line isn't sitting still, and four big catalysts could help it keep growing.
Its Smart Portal strategy
Like Tencent's WeChat and Facebook Messenger, Line is expanding its mobile app into an all-in-one platform filled with various services. These "smart portal" services include its payments platform Line Pay, its e-commerce portal Line Shopping, its food delivery service Line Delima, its comic book service Line Manga, and its music platform Line Music.
These businesses are firing on all cylinders. Transactions on Line Pay, which has 40 million registered users, rose 97% sequentially to 228 billion yen ($2.1 billion) during the fourth quarter. Line Shopping, which has 14 million registered users, saw its transaction volume jump 35% between November and December. During the same period, Line Delima -- which has 3.7 million registered users -- reported a 34% increase in transaction volume.
For the full year, Line Manga's transaction volume jumped 37% annually to 11.5 billion yen ($105 million), while Line Music's transaction volume surged 180% annually to 4.1 billion yen ($38 million). Looking ahead, Line hopes these growing services will squeeze out more revenues from its existing users as its MAU growth peaks.
A new cryptocurrency division
Line also recently revealed plans to launch a new division, Line Financial Corporation, which will offer loans, insurance, and a cryptocurrency exchange. Line's move into the fintech space wasn't surprising, since Tencent previously made similar moves into loans and insurance, but its announcement of a cryptocurrency exchange was unexpected.
Line stated that it would let users exchange digital currencies from within its app, and would "promote research and development of technologies such as blockchain" with its new fintech unit. Line's establishment of a secure cryptocurrency exchange could help it gain users, add a new stream of "smart portal" revenue, and become a major rival to other Japanese exchanges, which were hit by security issues before.
For example, hackers recently stole over $500 million worth of cryptocurrencies from the Japanese exchange Coincheck in a massive heist. Back in 2014, Tokyo-based Mt. Gox, the world's biggest bitcoin exchange at the time, went bankrupt as over 850,000 bitcoins went "missing".
The Clova platform
Last year, Line introduced Clova (short for "Cloud Virtual Assistant), its answer to virtual assistants like Siri, Alexa, and Google Now. It was initially introduced with the Clova Wave and mascot-themed Clova Friends speakers in South Korea and Japan.
Like other smart speakers, Line's Clova-powered speakers let users stream music, request information like weather and news updates, make VoIP calls, and control connected devices like TVs. However, they also let users read and send Line messages. This hands-free, speaker-based approach to mobile messaging gives the Clova platform a unique advantage against mobile messaging rivals like Facebook Messenger and WhatsApp.
Line is continuously adding new skills to Clova, and ramped up its availability at 362 major electronics retailers last quarter -- so it could become a new way to tether users to the company's growing ecosystem.
A big investment from SoftBank
Last but not least, Line recently agreed to let Japanese telco SoftBank take a 51% stake in its Line Mobile telco business. Line Mobile is a simple, low-cost MVNO (mobile virtual network operator) that gives users unlimited data for Line services and popular social media apps like Facebook and Instagram.
SoftBank is one of Japan's top telcos, but its domestic telco unit faces tough competition from rivals like NTT DoCoMo and KDDI. Therefore, taking a majority stake in Line Mobile might give it a younger, trendier, and higher-growth way to counter those heavyweights. SoftBank's investment should also give Line a lot more marketing support to attract new users -- which would be a win-win situation for both companies.
Leo Sun owns shares of SOFTBANK CP UNSP ADR and Tencent Holdings. The Motley Fool owns shares of and recommends Facebook and Tencent Holdings. The Motley Fool has the following options: long March 2018 $200 calls on Facebook and long March 2018 $170 puts on Facebook. The Motley Fool has a disclosure policy.