Krafton's Operating Profit Hits 410.9bn Won in Q2, but Kiwoom Securities Cuts Target Price to 290,000 Won

Kiwoom Securities on the 30th cut its target price for Krafton (KOSPI: 259960) from 340,000 won to 290,000 won, while maintaining its "Outperform" recommendation. The revised target is derived by applying a price-to-earnings multiple of 15 times to the firm's 2026 estimated net profit attributable to controlling shareholders of 981.3bn won, discounted at an annual rate of 10%.

Krafton reported second-quarter 2026 revenue of 1.29trn won and operating profit of 410.9bn won, translating to an operating margin of 31.8%—down 5.4 percentage points from 37.2% a year earlier. The operating profit figure also represented a 27% drop from the preceding quarter's 561.6bn won, underscoring the company's susceptibility to quarter-to-quarter earnings swings. Kiwoom Securities described the results as "broadly in line" with its prior estimates.

The main engine of revenue growth remained the Battlegrounds (PUBG) franchise. PC platform revenue surged 54% quarter-on-quarter to 560.4bn won, while mobile revenue came in at 451.0bn won. Milestone payments from Subnautica 2—revenue recognised in stages as development targets are met—were booked under other income, providing an additional lift to quarterly earnings.

Net profit, however, fell into the red, recording a loss of 29.9bn won. The culprit was a large non-operating charge arising from a settlement with former shareholder representatives of Unknown Worlds Entertainment, the studio behind Subnautica. The resultant spike in tax expense to 124.1bn won produced an effective tax rate of 131.7%—a mathematical anomaly that illustrates how severely the below-the-line charge distorted the bottom line. In short, solid operating performance was undone by an exceptional item outside the core business.

This dynamic warrants close attention from investors. The Subnautica 2 milestones contributed positively to operating profit, yet the settlement payment that accompanied the deal wiped out net profit. Kiwoom Securities cautioned that "additional content development is still required before Subnautica 2's full commercial launch," concluding that it is premature to incorporate the value of future IP milestone payments into Krafton's overall valuation at this stage.

Annual estimates were revised down across the board. The 2026 operating profit forecast was trimmed by 5.3%, from 1.58trn won to 1.50trn won, while the net profit forecast was slashed by 34.0%, from 1.25trn won to 825.8bn won. Operating profit projections for 2027 and 2028 were also reduced by 6.0% and 6.1% respectively. The fact that the net profit cuts are far deeper than those to operating profit suggests that uncertainty around non-operating costs could persist for some time.

Krafton's structural vulnerability remains its dependence on PUBG. The company generates operating profits unmatched among South Korea's listed game publishers, but the overwhelming share of near- to medium-term earnings derives from a single franchise. The possibility of new competitive titles entering the market and the natural maturation of PUBG's user base represent latent risks to earnings sustainability—risks that currently act as a ceiling on the valuation multiples the market is willing to assign.

The share price reflects this caution. At the close on 29 July, Krafton traded at 244,000 won—28.0% below its 52-week high of 339,000 won. The stock has delivered an absolute return of –22.7% over the past year, underperforming the broader market by 57.4 percentage points over the same period. Its market capitalisation stands at approximately 11.26trn won.

Diversifying beyond PUBG is the company's defining medium- to long-term challenge. Krafton has a pipeline of titles spanning multiple genres, but whether any of them can establish themselves as triple-A franchises in the global market is a question that Gamescom—the world's largest gaming trade fair, held annually in Cologne, Germany this August—may begin to answer. The event draws more than 200,000 visitors each year and commands the attention of global players and media alike, making it the first meaningful public test of how the market receives Krafton's new offerings.

Kiwoom Securities stressed that "building a mega IP cannot be accomplished in a single attempt," arguing that "achieving a re-rating of Krafton's enterprise value requires a strategic commitment over a three-to-five year development horizon." The implication is clear: the direction of the company's long-term portfolio strategy matters more than near-term earnings beats in determining whether the stock can command a higher multiple.

Krafton also carries ESG-related uncertainty. Its MSCI ESG rating stands at AA, placing it among the higher-ranked companies in its sector, but a lawsuit concerning alleged unlawful sale of user data was scheduled for a hearing at the Bombay High Court in Mumbai in April 2025. Given that foreign investors hold 43.5% of Krafton's shares, ESG risks have the potential to affect institutional demand for the stock.

On 2026 consensus estimates, Krafton trades at a price-to-earnings ratio of 13.7 times and an EV/EBITDA multiple of 5.3 times. With South Korea's major game publishers averaging roughly 20 times earnings, a case can be made that the stock remains undervalued. Yet the prevailing market view is that this discount is unlikely to narrow until Krafton can demonstrate a credible and visible source of revenue beyond PUBG.