Sea’s growth pivot at expense of profits stems from e-commerce competition

Shares of Southeast Asian tech giant Sea plummeted this week after missing revenue expectations and saying it might concentrate on growth over profits — a reversal from recent cost-cutting measures within the face of economic uncertainty. But analysts said the pivot is a move to defend market share.

On Tuesday, the corporate reported revenue that missed analyst expectations, coming in at $3.1 billion versus the $3.2 billion expected, in keeping with a Refinitiv consensus estimate.

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

The stock plunged after Tuesday’s earnings report, ending the session 28% lower.

Just last 12 months, Sea overhauled its business to concentrate on profitability amid high inflation and rates of interest. At the identical time, investors were pressuring tech firms to maneuver toward profitability. Other regional tech giants like GoTo and Grab slashed costs by conducting mass layoffs and reducing customer incentives.

Sea’s top management gave up their salaries, while the corporate froze salaries for many employees and paid out lower bonuses. Local media reported the corporate laid off greater than 7,000 employees in six months.

Consequently, Sea posted positive net income for the primary time within the fourth quarter of 2022 and that figure has remained within the black since. Before that, Sea was largely unprofitable, amassing billions of dollars in losses since its inception.

“The excellent news for them is that they’ve built up kind of a buffer to extend a few of its spending, with all of its segments now profitable,” said Woo.

Shopee stays the market leader within the region, with a gross merchandize volume of $47.9 billion in 2022, in keeping with a report from Momentum Works. Lazada’s GMV got here in at $20.1 billion in the identical 12 months.

“In our view, the pivot could possibly be driven by competition together with Sea positioning itself for a rise in consumer spend, and to grow live-streaming and in-house logistics,” said JPMorgan analysts.

But Sea’s decision to ramp up investments is more likely to impact earnings, said JPMorgan. The bank downgraded Sea’s rating from “chubby” to “neutral” with a price goal of $40.50, representing 2.56% upside from the stock’s Thursday close of $39.49.

“Sea’s decision to speed up ecommerce investments in growth is more likely to materially weigh on its earnings and share price within the near-term,” said JPMorgan.

“Sea could potentially incur heavy investments in second half of 2023 (a busy campaign period) leading to earnings decline in second half.”

Sachin Mittal, head of telecom, media and technology research at DBS Bank, is bullish on Sea. The firm has a price goal of $90 for Sea, representing roughly 160.9% upside.

“Defending your market share is the best strategy in e-commerce. You do not need to present a foot within the door to the brand new player. That is what we expect Sea’s doing,” said Mittal.

But TikTok Shop is “not such a big threat” to Shopee, he said.

“TikTok doesn’t have in-house logistics. They use third-party players to supply e-commerce packages,” Mittal said on CNBC’s “Squawk Box Asia” on Wednesday. Unlike TikTok Shop, Shopee and Lazada have their very own logistics networks of warehouses and fulfilment centers around the globe.