Naspers’s tricky path to e-commerce profit

Naspers will battle to turn its portfolio of e-commerce companies profitable by 2025 as the group hopes, an analyst says. The group has for years been working to invest in and grow its businesses outside its main moneymaker, China’s Tencent. 

In 2001 Koos Bekker, as CEO of Naspers, gave $32m to a small Chinese tech company, Tencent. Fast-forward two decades and that investment has made the Cape Town-based group Africa’s most valuable publicly traded group and a top 10 technology investor, alongside Facebook and Google.

Thought it is widely accepted as being one of the most astute moves in venture capital history, the success that has led to that investment being worth more than $100bn, carries with it a number of headaches for the group's management, now led by CEO Bob van Dijk. 

The biggest challenge facing Van Dijk is to show investors that other businesses within the group are viable, can grow faster than Tencent and can be turned into profitable companies that contribute meaningfully to the bottom line.

In its latest earnings report for the six months to end-September, the group trumpeted the performance of its e-commerce portfolio, which has shown strong organic revenue growth of 41%.

“Our e-commerce businesses are all profitable or break even at the core and we have accelerated efforts to drive profitable growth,” says Basil Sgourdos, group CFO of Naspers and Prosus. 

The issue is magnified, at least for investors, by billions spent in scaling the businesses to a point of profitability. This is not unusual. E-commerce giant Amazon spent years in the red as Jeff Bezos scaled and ploughed an eye-watering amount of capital into developing one of the world’s most formidable logistics, payments and loyalty systems with little to no profit. 

Profitability strained

E-commerce interim revenue, on an economic interest basis, grew 38% to $5.6bn for the group, with growth seen across all four core segments — fintech, classifieds, food delivery and education. 

But while the signs are good, profitability remains strained as the group’s businesses are at different levels of maturity. While some are making money, others are still losing it, to the tune of $1bn in the period. To compound the issue, the rest of the company’s businesses, estimated to be worth as much as $50bn last year, are now worth about R33bn, due to a global downturn in technology, the Russia-Ukraine war and regulatory crackdowns in China.

Sgourdos says the 2023 financial year is expected to mark the group's peak investment spend in the e-commerce businesses, “with profitability and cash flow generation improving from here on”.  The ambition is to be profitable “on aggregate” in the first half of 2025.

The question is whether investors still have the patience or appetite for such a path to glory. Some market players say there's much work to be done for the group to reach the desired profitability. 

“The losses from the non-Tencent businesses were worse than market expectations over the past six months and are likely to remain high for the remainder of the financial year,” said Peter Takaendesa, head of equities at Mergence Investment Managers. 

He says guidance of breaking even by March 2025 “looks unachievable” considering the trading losses and potential for tougher trading conditions over the next 12-18 months if the global economy enters a recession. “But … there is a lot of marketing and market development spend in these businesses that can be cut back materially when competitive activity reduces.

Senses shift

“We believe we are entering an environment where only the strongest will survive given slowing global growth and rising interest rates,” said Takaendesa. 

Renier de Bruyn, senior investment analyst at Sanlam Private Wealth, senses a shift in the group, saying “management’s ambition to get their e-commerce portfolio to profitability within the next two years is an important statement, and a material departure from the last decade when trading losses ballooned in the constant pursuit of capturing new growth opportunities”.

He believes the group has “enough to work with” within the existing portfolio, where management is likely to focus their efforts to improve returns for shareholders.

While hopeful, De Bruyn does note that “growth was driven by new initiatives that are generating substantial losses” in the period. “These businesses require scale to ultimately become profitable, which is why it remains crucial to sustain high top-line growth.”

Even in its home market, profit has been hard to come by for its online retail unit Takealot, which posted a $13m (R223m) interim loss to September. The business also comprises clothing business Superbalist and Mr Delivery.

Like other retailers globally, Takealot could be forced to start charging for returns of goods by customers, which have up to now been at the expense of the company. 

But whether it's about returns or scaling costs, at least Naspers and its subsidiaries have an estimated $20bn war chest at their disposable.  

“Our strong balance sheet and significant liquidity is a key advantage in the current climate; we will remain disciplined on M&A and committed to maintaining our investment-grade rating,” says Sgourdos. 

gavazam@businesslive.co.za