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Rakuten's growth hopes fade as e-commerce giant matures

Stock buyback plan brings temporary relief after profit slips for second year

TOKYO -- Rakuten shares received a boost Wednesday following news of a stock buyback plan, but the rally's staying power is in question, as the Japanese company's key operations sputter including the mainstay e-commerce business in its home country.

The stock gained more than 9% to close at 1,129.50 yen, one day after the Japanese company said it would repurchase up to 100 billion yen ($880 million) in its own shares.

"The current stock price is too cheap compared to our assumptions for the corporate value," Hiroshi Mikitani, Rakuten chairman and CEO, said Tuesday. The shares had fallen nearly 10% since Feb. 13, when Rakuten released the results for the year ended in December, which showed a second straight year of shrinking profit.

The Tuesday announcement of the buyback program apparently succeeded in conveying a message that the company's shares are underpriced, at least for now. But it must be hard to stomach for investors who picked up Rakuten shares through a roughly 180 billion yen secondary offer in June 2015. At the current stock price, the company would be buying back roughly the same number of shares that it issued in the offering for about 100 billion yen.

Back to basics

Rakuten stock has moved narrowly in the low-1,000s range over the past year.

The company "is turning from a growth stock to a matured stock," said Mitsushige Akino of Ichiyoshi Asset Management. The stock repurchase is an indication that few growth-oriented investment projects are underway.

Profit from the mainstay e-commerce business in Japan shrank on the year in the January-March quarter amid rising costs associated with its reward point program. The business enjoyed double-digit growth in gross merchandise sales for 2016, but appears to be struggling to overcome dependency on reward points.

The nation's e-commerce market poses intense competition from rivals such as Yahoo Japan, which appears to be willing to risk incurring losses in order to boost its presence.

Mikitani said Rakuten will recover in the April-September period, but the market is highly skeptical.

"We are only half-convinced [of the company's prediction of] a profit rebound this fiscal year," said Tatsunori Kawai of Kabu.com Securities.

Many of the company's overseas businesses are suffering from low profitability. Rakuten booked massive impairment losses in the year through December in a U.S. video-streaming affiliate and other operations. This followed a similar move with a French mail-order subsidiary the year before.

With growth drivers from abroad unlikely, Rakuten must implement bold measures in the domestic e-commerce business to inspire optimism for its future growth among investors.

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