Sea pivoted to growth over profits as it faced rising competition from TikTok, Lazada, analysts say

Shares of Southeast Asian tech large Sea plummeted this week after lacking income expectations and saying it could give attention to progress over earnings — a reversal from current cost-cutting measures within the face of financial uncertainty. But analysts stated 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.

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

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

Just final yr, Sea overhauled its business to give attention to profitability amid excessive inflation and rates of interest. At the identical time, traders have been pressuring tech corporations to maneuver towards profitability. Other regional tech giants like GoTo and Grab slashed prices by conducting mass layoffs and decreasing buyer incentives.

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

As a outcome, Sea posted optimistic internet revenue for the primary time within the fourth quarter of 2022 and that determine has remained within the black since. Before that, Sea was largely unprofitable, amassing billions of {dollars} in losses since its inception.

“The good news for them is that they have built up sort of a buffer to increase some of its spending, with all of its segments now profitable,” stated Woo.

In explicit, Li stated the corporate has “started, and will continue, to ramp up our investments in growing the e-commerce business across our markets.” JPMorgan stated these investments may take the type of costly delivery subsidies and low cost vouchers.

“Given the weakening macro environment and increasing competition from Lazada and TikTok Shop, Sea probably did not have much of a choice but to start spending to at least maintain its market share in the region,” stated Jonathan Woo, senior analysis analyst at Phillip Securities Research.

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 could be driven by competition along with Sea positioning itself for an increase in consumer spend, and to grow live-streaming and in-house logistics,” stated JPMorgan analysts.

But Sea’s choice to ramp up investments is more likely to impression earnings, stated JPMorgan. The financial institution downgraded Sea’s ranking from “overweight” to “neutral” with a value goal of $40.50, representing 2.56% upside from the inventory’s Thursday shut of $39.49.

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

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

Sachin Mittal, head of telecom, media and expertise analysis at DBS Bank, is bullish on Sea. The agency has a value goal of $90 for Sea, representing roughly 160.9% upside.

“Defending your market share is the right strategy in e-commerce. You don’t want to give a foot in the door to the new player. That’s what we think Sea’s doing,” stated Mittal.

But TikTok Shop is “not such a large threat” to Shopee, he stated.

“TikTok doesn’t have in-house logistics. They use third-party players to provide e-commerce packages,” Mittal stated on CNBC’s “Squawk Box Asia” on Wednesday. Unlike TikTok Shop, Shopee and Lazada have their very own logistics networks of warehouses and fulfilment facilities all over the world.

“This is one of the ways to compete with TikTok. TikTok is still very small. It’s not such a large threat,” stated Mittal. TikTok Shop’s present GMV is simply a fraction of Shopee and Lazada’s.

— CNBC’s Michael Bloom contributed to this report.