DS Investment Securities has maintained a "buy" rating on DearU (KOSPI: 376300) whilst slashing its target price by 34%, from 50,000 won to 33,000 won. Based on the closing price of 21,850 won on 4th August, that still implies upside of 51%.

The cut reflects a sector-wide rerating rather than any company-specific deterioration. DS has lowered the target price-to-earnings multiple it applies across the entertainment industry from 30 times to 20 times. Applied to DearU's 12-month forward earnings per share of 1,640 won, that produces the new target. The revised multiple is decidedly conservative: the stock's average P/E between 2023 and 2025 was 34 times.

Solid growth, but short of expectations

DearU's second-quarter results (April–June) showed continued top-line momentum. Revenue rose 16% year on year to 23.4 billion won, while operating profit climbed 27% to 9.5 billion won, yielding an operating margin of 40.5%. Even so, the result fell marginally short of the market consensus of 10.2 billion won in operating profit.

Subscriber erosion is the central concern

The more troubling signal came from DearU's flagship product, Bubble — a paid messaging service that connects K-pop artists directly with fans. Paid subscribers fell to 1.97 million at the end of the second quarter, down 2% from 2.01 million in the first quarter and more than 9% below the 2.17 million recorded a year earlier.

The decline stems largely from the termination of services tied to certain artist accounts, including NCT members Mark and Lucas, which prompted some fans to cancel their subscriptions. New artists joining the platform — among them NCT's Jaehyun, The Rose, and AND2BLE — were insufficient to plug the gap.

Overseas revenues provide a cushion

Several offsetting factors prevented a sharper earnings miss. A weaker Korean won provided a currency tailwind, and royalty income from Japan and China continued to expand. Bubble for Japan, DearU's Japanese subsidiary, added subscribers at pace, ending the second quarter with 107,000 paying users — up 8% quarter on quarter. Usage on China's QQ Music platform rose 25% over the same period. The number of artists available on Bubble in China has grown substantially: K-pop acts now number 351 and C-pop acts 129, compared with 285 K-pop acts and no C-pop acts a year ago.

On costs, efficiency gains in payment-processing fees and server expenses were partially offset by higher selling, general and administrative expenses — up 9% year on year — as the company hired new staff for its American operations and began recognising depreciation on offline retail premises.

Medium-term growth levers

DS Investment Securities identifies two drivers of longer-term growth. First, combined annual royalty income from Japan and China is forecast to reach 2.8 billion won in 2026, equivalent to roughly 7% of total profit. Second, the company's nascent American business — which recently began incurring staff and retail costs — is expected to start contributing meaningfully to earnings in due course. At its most recent annual general meeting, DearU expanded its stated business purposes to include celebrity merchandise production, domestic and international distribution, the manufacture of dolls, toys and leisure goods, and character development and commercialisation.

Risks worth watching

Two risks stand out for investors. The first is the durability of the subscriber decline. DearU's business model is structurally exposed to the fortunes of individual artists: when a prominent act leaves the platform, a portion of its fan base tends to follow. This concentration risk has surfaced repeatedly and could intensify if further high-profile departures occur. The second is the timeline for its American venture. Costs are already being incurred, but revenue generation may take considerably longer to materialise, creating a drag on near-term profitability.

Valuation looks undemanding

On a medium-term view, the growth trajectory remains broadly intact. DS forecasts DearU's full-year 2026 revenue at 93.5 billion won, up 11.5% year on year, with operating profit of 38.2 billion won, up 21.6%. The operating margin is projected to widen to 40.9%, a significant improvement on the 33.9% recorded in 2024. By 2027, operating profit is expected to reach 42.5 billion won, with margins expanding further to 42.9%. At the current share price, the stock trades on a 2026 forward P/E of just 14.8 times and an EV/EBITDA of 8.2 times — well below historical norms.

DearU counts SM Entertainment (45.7% stake) and JYP Entertainment (10.0%) among its principal shareholders. The stock's 52-week high was 58,900 won; at current levels it trades roughly 63% below that peak, with a market capitalisation of approximately 519 billion won (roughly $375m).