Executives of Webtoon Entertainment, including Naver Webtoon and Webtoon Entertainment CEO Kim Jun-koo, center, pose with Korean webcomic artists in New York, June 27 (local time). Yonhap

Naver Webtoon is grappling with multiple crises, including a significant decline in stock prices, a potential class-action lawsuit from shareholders and escalating internal challenges. These issues arise just three months after its U.S. subsidiary, Webtoon Entertainment, went public on Nasdaq on June 27.

As of Tuesday, several U.S. law firms specializing in securities litigation, including Robbins Geller Rudman & Dowd and BG&G, announced they are preparing a class-action lawsuit against Webtoon Entertainment. The firms plan to recruit plaintiffs until Nov. 4.

They allege that the company failed to properly disclose key negative information during the initial public offering (IPO) process, including a decline in revenues from advertising and intellectual property businesses.

Furthermore, the firms claim that the impact of the weakening Korean won and the Japanese yen against the U.S. dollar, which affected profitability, was not adequately communicated. Nearly 80 percent of the company's revenues come from paid content, with 90 percent of that generated in Korea and Japan.

The latest development follows a sharp decline in Webtoon Entertainment's stock price, which has fallen to half of its IPO price of $21 after the release of disappointing second-quarter earnings. In August, the company reported an operating loss of $79.1 million and a net loss of $76.57 million. Management explained the figures were largely due to one-off costs involving the IPO, as well as exchange rate fluctuations in key markets.

The announcement immediately triggered the stock price to drop 38 percent in a single day. Despite efforts by top executives, including the purchase of over 60,000 shares to boost investor confidence, the share price has yet to recover. The stock closed at $11.23 on Monday (local time).

In response to the lawsuit, the company acknowledged the situation and said it intends to defend itself vigorously.

Employees of Webtoon Entertainment celebrate following the company's listing on the Nasdaq in Times Square, New York, June 27. Reuters-Yonhap

Attention is now turning to the company's future business prospects and its ability to recover. A key challenge is its declining user metrics.

In the second quarter, the number of monthly active users and monthly paying users dropped by 0.8 percent and 0.4 percent, respectively, compared to the same period last year. In Korea, the decline was even more pronounced, with the figures falling by 6.6 percent and 7.5 percent, respectively. This decline has been attributed to both the end of the pandemic and increasing dissatisfaction with mass-produced webtoons that follow repetitive themes.

Shinhan Securities analyst Kim A-ram pointed out that the company's recent weak performance and disappointing third-quarter guidance have raised concerns about its long-term growth potential and the viability of its overall business model.

"For a steady rise in stock prices, the company will need to either demonstrate sustainable profit growth or produce a successful webtoon IP."

Meanwhile, Naver Webtoon is facing internal labor tensions. Since last year, the company has been under emergency management in preparation for its IPO. However, the labor union asserts that compensation, including stock options, has been disproportionately allocated to a select few executives following the listing.

After nine rounds of negotiations, the union and management remain at an impasse. Last month, the union declared the talks had failed and entered into a mediated negotiation process. If no agreement is reached during this period, the union may proceed with a strike.

Adding to the troubles is an online boycott movement. The backlash erupted after a webtoon accused of containing misogynistic content advanced to the second stage of a new talent competition on Aug. 25, overseen by the company's editorial team.

In response to market skepticism, Naver Webtoon announced plans to enhance profitability through its secondary IP business in Japan and its advertising operations in the U.S. Webtoon Entertainment aims to raise its advertising revenue share from 11 percent in the first quarter of this year to 20 percent in the long term.