Sea’s development pivot at expense of income stems from e-commerce competitors

Shares of Southeast Asian tech large Sea plummeted this week after lacking income expectations and saying it might concentrate on development over income — a reversal from current cost-cutting measures within the face of financial uncertainty. However analysts mentioned the pivot is a transfer to defend market share.

On Tuesday, the corporate reported income that missed analyst expectations, coming in at $3.1 billion versus the $3.2 billion anticipated, based on a Refinitiv consensus estimate.

Whereas Forrest Li, Sea’s chairman and group CEO, mentioned the corporate has “achieved self-sufficiency” and is “now on firmer footing,” he mentioned Sea will now “reaccelerate investments in development.”

The inventory plunged after Tuesday’s earnings report, ending the session 28% decrease.

Simply final yr, Sea overhauled its enterprise to concentrate on profitability amid excessive inflation and rates of interest. On the identical time, traders had been pressuring tech companies to maneuver towards profitability. Different regional tech giants like GoTo and Seize slashed prices by conducting mass layoffs and lowering buyer incentives.

Sea’s prime administration gave up their salaries, whereas the corporate froze salaries for many staff and paid out decrease bonuses. Native media reported the corporate laid off greater than 7,000 staff in six months.

Consequently, Sea posted optimistic internet earnings for the primary time within the fourth quarter of 2022 and that determine has remained within the black since. Earlier than that, Sea was largely unprofitable, amassing billions of {dollars} in losses since its inception.

“The excellent news for them is that they’ve constructed up type of a buffer to extend a few of its spending, with all of its segments now worthwhile,” mentioned Woo.

Particularly, Li mentioned the corporate has “began, and can proceed, to ramp up our investments in rising the e-commerce enterprise throughout our markets.” JPMorgan mentioned these investments may take the type of costly transport subsidies and low cost vouchers.

“Given the weakening macro atmosphere and rising competitors from Lazada and TikTok Store, Sea in all probability didn’t have a lot of a alternative however to begin spending to no less than keep its market share within the area,” mentioned Jonathan Woo, senior analysis analyst at Phillip Securities Analysis.

Shopee stays the market chief within the area, with a gross merchandise quantity of $47.9 billion in 2022, based on a report from Momentum Works. Lazada’s GMV got here in at $20.1 billion in the identical yr.

“In our view, the pivot might be pushed by competitors together with Sea positioning itself for a rise in client spend, and to develop live-streaming and in-house logistics,” mentioned JPMorgan analysts.

However Sea’s choice to ramp up investments is prone to affect earnings, mentioned JPMorgan. The financial institution downgraded Sea’s ranking from “obese” to “impartial” with a worth goal of $40.50, representing 2.56% upside from the inventory’s Thursday shut of $39.49.

“Sea’s choice to speed up ecommerce investments in development is prone to materially weigh on its earnings and share worth within the near-term,” mentioned JPMorgan.

“Sea may doubtlessly incur heavy investments in second half of 2023 (a busy marketing campaign interval) leading to earnings decline in second half.”

Sachin Mittal, head of telecom, media and know-how analysis at DBS Financial institution, is bullish on Sea. The agency has a worth goal of $90 for Sea, representing roughly 160.9% upside.

“Defending your market share is the precise technique in e-commerce. You do not need to give a foot within the door to the brand new participant. That is what we expect Sea’s doing,” mentioned Mittal.

However TikTok Store is “not such a big menace” to Shopee, he mentioned.

“TikTok would not have in-house logistics. They use third-party gamers to supply e-commerce packages,” Mittal mentioned on CNBC’s “Squawk Field Asia” on Wednesday. Not like TikTok Store, Shopee and Lazada have their very own logistics networks of warehouses and fulfilment facilities world wide.

“This is likely one of the methods to compete with TikTok. TikTok continues to be very small. It is not such a big menace,” mentioned Mittal. TikTok Store’s present GMV is just a fraction of Shopee and Lazada’s.

— CNBC’s Michael Bloom contributed to this report.