Description

Executive summary

Mercari is a Japanese e-commerce company founded in 2013.  The company operates Mercari Japan, the dominant online used goods C2C marketplace in Japan with over 23 million monthly active users and annual gross merchandise value (“GMV”) of JPY 1.1 trillion.  Mercari Japan is a unique asset that enjoys solid economics thanks to its strong and widening network effects moat as the largest, most liquid resale marketplace.  Growth prospects remain bright, underpinned by an estimated second-hand goods market size of JPY 7.6 trillion and an ongoing shift of transactions from offline to online channels.  We believe Mercari Japan on its own is worth nearly double the current market cap based on 20x FY Jun-2026 NOPAT. 

Why does this opportunity exist?

This opportunity exists because investors have been frustrated by management’s continued investment into loss-making initiatives.  In particular, the company remains committed for now to its Mercari US business, an online used goods marketplace operating in the highly competitive US market.  Furthermore, Mercari has been investing aggressively into its Fintech segment which offers payment services, short-term credit, and even bitcoin trading to its users.  Mercari’s financial reporting may also contribute to investor misunderstanding with numerous adjustments and opaque disclosures around Fintech and intracompany economics. 

Mercari shares are especially discounted today because of rotation into positive momentum factor Japanese exporters and semiconductor-related companies which benefit from JPY depreciation and out of Internet services and domestic-oriented companies.  Year-to-date, the Mothers Index has declined 7%, significantly underperforming TOPIX’s 23% gain.  Mercari has performed in-line with the Mothers Index even after a recent 42% rebound from the recent lows.  Over the past three years Mercari shares have declined 59%, compared with the Mothers Index decline of 43% and the TOPIX’s 61% total return.

Multiple ways to win

We believe there are numerous ways for investors to win from here, including some combination of activist engagement, further compounding of Mercari Japan, a sale of Mercari US, and a profit inflection for the Fintech segment.  While the latter two will require management to adjust their current investment and capital allocation mindset, we believe increasing shareholder pressure from the severely depressed share price will inevitably lead management to make changes.  A reversal in the investment trends highlighted above (momentum factor and JPY sensitivity) may also be positive for the share price.

Given the significant value in Mercari Japan, we believe Mercari shares offer a highly asymmetric return profile.  While the share price is currently ascribing a large negative value to Mercari US and the Fintech segment, we believe both businesses have positive value and represent sources of upside optionality.  Fintech in particular has the potential to grow into a sizeable consumer finance business. 

Company background

Mercari was written up twice on VIC in early 2021.  Those excellent write-ups provide thorough descriptions of the Mercari Japan business model and competitive advantages. 

In summary, Mercari Japan is one of the most dominant online marketplaces we have encountered by user and engagement share metrics.  In the five years ending FY Jun-2023, Mercari Japan compounded MAU, GMV, Net Sales, and Adjusted OP at 16%, 23%, 25%, and 43% respectively.  Perhaps the only pushback on Mercari Japan is that it is becoming a victim of its own success.  Growth has naturally decelerated as Mercari Japan has scaled to nearly JPY 1.1 trillion of GMV.  That said, we believe visibility for further growth remains high, underpinned by the vast second-hand goods market and continuing offline to online shift.  We forecast Mercari Japan will still grow GMV at an over 10% CAGR for several years with Net Sales and OP compounding faster due to operating leverage.

Note that Mercari provides both an Unadjusted and Adjusted OP figure for Mercari Japan.  We value the business off of the lower Unadjusted OP figure which includes payment processing fees paid to the Fintech segment.

At 20x FY Jun-2026 NOPAT, Mercari Japan is worth nearly 2x the current market cap

At 16-24x FY Jun-2026 unadjusted NOPAT, Mercari Japan could be worth JPY 3,500 to 5,250 per share which represents 42-114% upside from the current share price.  Our base case uses the mid-point 20x NOPAT multiple and implies a Mercari Japan value of JPY 4,370 per share, nearly double the current share price.  

Given the limited capex requirements of an asset-light C2C marketplace, we think 16-24x NOPAT (4.2-6.3% “NOPAT yield”) is reasonable for a dominant, growing franchise in the low growth, low interest rate Japanese market.  The high-end 24x NOPAT multiple is in-line with the average 2026 EV/NOPAT of a group of leading online marketplaces (see below).

Online marketplace valuations

The comp sheet below includes leading asset-light online marketplaces as well as two leading Japanese e-commerce operators.  A few comments:

• The peer group is trading at a median 2026 EV/NOPAT of >24x (2026 PE of 23x)

• At the current 11.2x FY-Jun26 NOPAT, Mercari Japan is trading at a 53% discount to the peer group on EV/NOPAT despite similar growth and margins

• As context, for the companies in this comp set, EV/NOPAT multiples are very similar to PE multiples.  On average, the EV/NOPAT multiples are ~2-3x turns higher than PE.

• For Mercari, the EV/NOPAT multiples are based on Mercari’s current market cap and EV against Mercari Japan’s financials (EBIT, NOPAT).  The margins and CAGR statistics are also for the Mercari Japan business.

• We’ve shown Mercari’s FY-Jun24 to FY-Jun26 multiples.  Mercari’s discount would be even larger if we were to roll forward the financials by six months to reflect FY-Dec24 to FY-Dec26 figures.

Mercari’s share price implies a large negative value for Mercari US and Fintech 

If we take the current JPY 336 billion EV (assuming JPY 66 billion of net parent level cash per management guidance) and back out Mercari Japan at our base case valuation of JPY 715 billion (JPY 4,370 per share), the remaining Mercari businesses are valued at negative JPY 379 billion (negative JPY 2,315 per share)!  This is equivalent to capitalizing the other segments’ combined operating losses (TTM Mar-2024) at an absurd 30x.  This is punitive to say the least.

In our view, both Mercari US and the Fintech segment offer positive value.  Specifically, we think Mercari US could be sold for at minimum USD 300 million while Fintech has potential to be valued at USD 500 million to 1 billion within the next 3 years.

Mercari US

Mercari ranks second to Poshmark in terms of Google search trends in the US, followed by ThredUp and The RealReal.  This ranking has remained consistent over the past five years.

Mercari US has underperformed peers

Mercari US’s operating momentum stalled following a short-lived COVID boom.  Competing platforms like The RealReal and ThredUp also witnessed a post-COVID slowdown yet Mercari US underperformed.  In response, Mercari recently announced a seismic change in monetization by eliminating seller commissions paid to the platform in hopes of igniting the supply side of the marketplace.  We will see at the upcoming results whether growth momentum was reignited and at what cost.  

Mercari US could be worth $300m USD based on peer valuations

Based on the Naver acquisition of Poshmark in 2022 and current valuations of The RealReal and ThredUP, we believe Mercari US is worth at minimum USD 300 million.

Poshmark acquisition multiples imply a USD 650 million valuation for Mercari US

Naver announced it would acquire Poshmark in October 2022, and the transaction closed in January 2023.  The Poshmark acquisition multiples imply a USD 650 million valuation for Mercari US.  Even if we haircut this by 50%, Mercari US would be worth USD 325 million USD (equivalent to JPY 51 billion or 310 per share)

The RealReal and ThredUP valuations imply a USD 260-365 million valuation for Mercari US based on EV/GMV and EV/sales 

The RealReal and ThredUp are listed competitors of Mercari US.  While there are differences in the models, all three companies focus on reselling used goods on their platforms.  REAL and TDUP trade at average multiples of 0.4x EV/Run-Rate GMV and 0.9x EV/Run Rate Sales.  At these multiples, Mercari US would be worth USD 260-365 million.

Rapidly growing Fintech segment represents a more significant source of upside 

In the 2021 VIC write-ups, the authors argued that Mercari US could be a significant driver of value.  In light of the slowing operating momentum at Mercari US, this no longer seems as likely.  However, Mercari has steadily developed its Fintech segment, which is on the cusp of profitability.  Given rapid growth and increasing scale, Fintech will likely become another pillar of value, though still dwarfed by the value of the Mercari Japan business.

Mercari published a detailed presentation on its Fintech segment worth reviewing (https://speakerdeck.com/mercari_inc/merpay-overview-en).  The segment includes a range of products and services based around Merpay, a mobile payment system and an online wallet.  Users are eligible to obtain short term credit (e.g., buy-now-pay-later options via lump-sum payments or fixed amount payments) based on their Mercari transaction history.  More recently, Mercari began issuing credit cards and enabled bitcoin trading.  Both the credit card offering and bitcoin trading platform had successful launches which speaks to the platform potential of the Fintech segment and management execution within the Japanese market.

As of Mar-2024, Mercari Japan had 23 million users, most of which are also Merpay users.  In the most recent quarter, Merpay users reached 17.4 million, a 15% increase over the prior year.

Roll-out of services since Merpay’s launch in 2019

Mercari views Merpay and its broader fintech suite as synergistic to its marketplace operations.  The following diagrams illustrate how the company sees the fintech services bolstering the overall Mercari ecosystem.

Fintech services includes three focus areas, namely payment, credit, and asset management. 

Payments services:  Merpay enables online and offline payments for consumer and business users.  The majority of transactions are related to activity taking place within the Mercari ecosystem.  While initially management may have hoped to build the primary Japanese mobile payment platform, that ship probably sailed following the combination of Yahoo! Japan and LINE.

Credit services:  Mercari offers short term credit through its Merpay Smart Payments offering.  Smart Payments enables users to pay for purchases later (BNPL) with credit limits determined by their Mercari transaction history.  Users can set their own usage limits and manage repayment schedules through the Merpay app.  Mercari claims that 30% of Merpay users use deferred payment services, skewing toward younger users.  Interestingly, 70% of deferred payment service users also have a credit card.

Mercard launched November 2022:  Mercard is the credit card offering with credit limits determined by Mercari transaction history.  To encourage usage, Mercari offers up to 4% points back when users use Mercard or deferred payment through Merpay Smart Payments.  Mercard growth is impressive, reaching 3 million cards in less than 18 months and growing by more than 500,000 cards per quarter.  Given 23 million Mercari users and (17.4 million Merpay users), cards issued will likely surpass that of listed companies such as Pocket Card (acquired by Itochu), Marui, and Orient Corporation.

Asset Management services:  In March 2023, Mercari launched Mercoin, a bitcoin trading platform accessible through Merpay.  Users can apply for a Mercoin account through the Mercari app in as little as 30 seconds.  Crypto trading is limited to Bitcoin with all prices listed in JPY and trades starting from JPY 1.  Beginning in Feb 2024, users can use Bitcoin to shop on Mercari.  Growth in Mercoin accounts is impressive, surpassing 2 million accounts within one year.  Based on industry data, Mercoin accounted for 60% of all new cryptoasset accounts in Japan between February 2023 and February 2024.

Fintech financials

Mercari has started to provide more granular financial information for the Fintech segment.  Based on the disclosed financials as well as the margin profile of similar consumer credit businesses in Japan, we believe the Fintech segment is on the cusp of profitability, which could be a potential catalyst for a rerating.  Note that financial disclosures are not entirely straightforward, even with the recently disclosed “Data Sheet” (IR | Mercari, Inc.).  For example, when is the last time you encountered a business with six interpretations of “Operating Profit”? 

Below we’ve pieced together the Fintech segment’s financials and included forecasts through FY-Jun26.  A few comments:

• Fintech Unadjusted Revenues have grown over 45% in the past two quarters

• Unadjusted OP has been slightly above break-even

• Unadjusted Revenue and OP include revenue and profit from payment processing fees charged to Mercari Japan

• Unadjusted OP includes sizeable expenses related to “Investment for New Services”, excluding which the Fintech segment would be highly profitable at 30% OP margin 

For our forecasts, we assume segment margins before investment for new services improve slightly from 30% to 33% in FY Jun-2026.  We also assume increasing levels of investment for new services, resulting in FY Jun-2026 Unadjusted OP of JPY 6.7 billion.  At a 10-20x NOPAT multiple, the Fintech segment would be valued at JPY 47-94 billion or 285 to 570 per share.  

There could be considerable upside to our forecasts.  Our forecast includes JPY 18 billion of investment for new services, up from JPY 12.7 billion in the 12 months ending March 2024.  If Mercari limited investment in new services to JPY 15 billion in FY Jun-2026, reported Unadjusted OP would increase 45% from JPY 6.7 billion to 9.7 billion.  Furthermore, these forecasts remain below the JPY 11.7 billion of Unadjusted OP before investment in new services that Mercari Fintech reported in TTM Mar-2024.

Fintech segment sense check

We compared Fintech segment margins against similar Japanese consumer credit businesses and believe 30% OP margins before investment in new service appears reasonable.  In terms of scale, Mercari Fintech is on track to surpass Pocket Card scale at the time of acquisition.  In 5 years, Fintech could reach the current scale of Marui.  As context:

• Pocket Card was privatized at a JPY 84 billion or 15x FY Feb-2018 NOPAT

• Marui Fintech segment accounts for 80-90% of OP and EBITDA for a business valued at JPY 490 billion trading at 15x FY Mar-2026 P/E

Based on this comparison with somewhat similar consumer credit businesses, we feel comfortable that the Fintech segment can achieve its purported 30% unadjusted OP margins before investment in new services.  In addition we feel comfortable with a 10-20x NOPAT multiple, especially in light of substantially higher than Japanese financial sector growth rates.

Mercari SOTP valuation

Below are our bear/base/bull case scenarios based on a SOTP framework.  

A few thoughts on management

The Japanese market has numerous examples of companies trading at large discounts to NAV.  Typically, these companies suffer from a combination of poor management, poor corporate governance, and limited shareholder returns.

In contrast, Mercari is regarded as one of Japan’s most innovative Internet companies.  Its founder and current CEO, Shintaro Yamada still owns 24% of the company and has been a magnet for attracting the best engineering talent in Japan.  As evidenced by Mercari US and Fintech, the company is willing to invest aggressively in ambitious new initiatives with an eye towards long-term value creation.  

All that said, the environment around Mercari has changed.  Specifically, Mercari Japan growth slowed, Mercari US lost momentum, the share price significantly underperformed, and corporate Japan has been prodded into sharpening capital allocation.  Sustained share price weakness may eventually affect perceptions of Mercari as a leading high growth business and hinder the ability to attract, motivate, and retain talent.  

Catalysts

• Sale of US business

• Fintech business reaches profitability, inclusive of investment for new services

• Activist involvement

• Momentum reversal away from JPY weakness beneficiaries

Risks

• Mercari Japan growth decelerates faster than expected due to penetration or unforeseen competition (e.g., Temu)

• Losses increase in Mercari US and Fintech 

• Management rebuffs constructive shareholder engagement

Catalyst

• Sale of US business

• Fintech business reaches profitability, inclusive of investment for new services

• Activist involvement

• Momentum reversal away from JPY weakness beneficiaries