Is AI investment slowing Naver's profits?

The outlook for internet giant Naver’s third-quarter earnings is turning gloomy, with analysts expecting operating profit to decline by double digits, citing spending on artificial intelligence (AI) infrastructure and the slow monetization of AI services.

According to market tracker FnGuide, the brokerage consensus estimate for Naver's third-quarter operating profit stood at 500 billion won ($377.5 million), down 12.4 percent from 570.66 billion won a year earlier, as of Wednesday.

This contrasts with the projected 12 percent increase in revenue to 3.51 trillion won from 3.14 trillion won over the same period.

Among the various factors, rising costs appear to be the biggest contributor to the decline. These include increased marketing expenses for Naver's commerce business, World Cup broadcasting rights costs reflected in the third-quarter results and higher depreciation expenses stemming from investments in graphics processing units (GPUs).

Naver categorizes its operating expenses into development, operations, partnership, infrastructure and marketing costs. Of these, infrastructure expenses include depreciation costs associated with GPUs and other computing resources used for AI.

The company has consistently recorded infrastructure costs of more than 200 billion won per quarter since the third quarter of last year, with expenses reaching 250.8 billion won in the first quarter of this year.

Although infrastructure expenses fluctuate depending on individual investments, analysts expect Naver's overall operating expenses and depreciation costs to remain on an upward trajectory.

Eugene Investment & Securities projected Naver's total operating expenses to rise 16.7 percent year-on-year to 2.99 trillion won in the third quarter and surpass the 3 trillion won mark to reach 3.1 trillion won in the fourth quarter.

Kyobo Securities estimated that Naver's depreciation expenses will increase from 824 billion won this year to 943 billion won in 2027 and 1.041 trillion won in 2028.

Naver's expenses have also been affected by a change in how it accounts for its computing assets. In the second quarter, the company said it extended their estimated useful lives from five to six years. Naver said the change reflects the assets' actual expected usage periods and will defer approximately 100 billion won in depreciation expenses annually.

Spreading the costs over six years reduces annual depreciation expenses, but does not eliminate the costs themselves. Major U.S. tech companies, including Microsoft, Alphabet and Meta, have also extended the estimated useful lives of their servers in recent years. Amazon, however, shortened the useful life of certain servers from six to five years starting in 2025, citing the rapid pace of technological advances in AI.

While costs are expected to rise, revenue growth from AI services remains slow.

“New ad placements, such as ads in AI Briefing, are still contributing only a limited amount of revenue and will not expand in earnest until 2027,” Eugene Investment & Securities analyst Chung Ui-hoon said. He added that third-quarter infrastructure costs are expected to reflect rising depreciation from GPU investments.

Korea Investment & Securities analyst Chung Ho-yoon noted that Naver's share price has given up most of its gains since the company announced its AI factory business in June. He attributed the decline to the time needed for the data center business to generate meaningful revenue and delays in announcing contracts with major tenants, which have kept investors on the sidelines.