Caution, Line IPO investors: two key metrics look to have peaked

Will Line's cute stickers go the way of Farmville fenceposts?

The good news for investors in Line Corp. (LN) is that the Japan-based company was the first messaging service to get users to pay for sending stickers and other add-ons, as well as play games.

That market innovation helped Line generate revenue growth along with attracting 218 million monthly active  users, driving its valuation to near $10 billion.

The bad news for retail investors hoping to cash in on its IPO is that two important metrics look to have already peaked. Revenue rose just 19% in the first quarter, according to the company's F-1 filing with U.S. securities regulators. That's less than half the 40% growth for all of 2015.

And usage of emoji-like stickers among users looks to have peaked two years ago.

Messages with stickers reached 12% of all messages in 2014, but that percentage has been falling ever since and is now at 10%.

These two trends should be a strong caution flag to U.S. investors, who'll be able to buy Line shares directly after they debut in New York on Thursday. (The shares are also listing in Tokyo.)

Line shares jump in Wall Street debut

They suggest that the company, which faces global competitors such as China's WeChat and Facebook's two messaging platforms, may have hit a growth wall as it tries to expand outside its Asian strongholds.

The company has more than 80% of the messaging market in Japan, Taiwan and Thailand, but only 12% of the U.S. market.

To maintain growth, it will likely have to spend heavily on both marketing and product development.

The seriousness of Line's challenge reminds me of the one that eventually decimated the valuation of other game makers.

Zynga Corp. (ZNGA) plunged from its IPO price after all the online users willing to pay to build virtual farms on Facebook did so.

Likewise with King Digital Entertainment, which was valued at $7.1 billion in a March 2014 IPO. Its shares fell 50% during their first six months of trading and the company was acquired by Activision Blizzard for $5.9 billion this past February.

Still, Line's mobile message users may not prove as fickle as those online game players, who are typically always on the hunt for new add-ons and games.

Line has posted impressive growth since it was founded five years ago in the wake of Japan's deadly 2011 earthquake, which disrupted other forms of telecommunication. It was enough to help the company eke out a small operating profit of $17 million for all of 2015. Line posted a much-higher profit in the first quarter of this year, of $47 million.

Yet that figure was helped in large measure by the company's decision to chop marketing expenses in half from the year-earlier period, according to the SEC filing.

As it looks to expand against larger overseas rivals, Line will be extremely hard-pressed to maintain that expense trajectory, which could crimp near-term profits.

John Shinal has covered tech and financial markets for more than 15 years at Bloomberg, BusinessWeek,The San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others. Follow him on Twitter: @johnshinal.