Forrest Li, chief executive officer of Sea Ltd., in Singapore, on Wednesday, May 3, 2023.
Ore Huiying | Bloomberg | Getty Images
Shares of Southeast Asian tech giant Sea plummeted this week after missing revenue expectations and saying it would focus on growth over profits — a reversal from recent cost-cutting measures in the face of economic uncertainty. But analysts said the pivot is a move to defend market share.
On Tuesday, the company reported revenue that missed analyst expectations, coming in at $3.1 billion versus the $3.2 billion expected, according to a Refinitiv consensus estimate.
While Forrest Li, Sea’s chairman and group CEO, said the company 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 year, Sea overhauled its business to focus on profitability amid high inflation and interest rates. At the same time, investors were pressuring tech firms to move 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 company froze salaries for most employees and paid out lower bonuses. Local media reported the company laid off more than 7,000 employees in six months.
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.
Sachin Mittal
Head of telecom, media and technology researh, DBS Bank
As a result, Sea posted positive net income for the first time in the fourth quarter of 2022 and that figure has remained in 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,” said Woo.
Boosting e-commerce
In particular, Li said the company has “started, and will continue, to ramp up our investments in growing the e-commerce business across our markets.” JPMorgan said those investments could take the form of expensive shipping subsidies and discount 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,” said Jonathan Woo, senior research analyst at Phillip Securities Research.
Sea’s decision to accelerate ecommerce investments in growth is likely to materially weigh on its earnings and share price in the near-term.
JPMorgan
Head of telecom, media and technology research, DBS Bank
Shopee remains the market leader in the region, with a gross merchandise volume of $47.9 billion in 2022, according to a report from Momentum Works. Lazada’s GMV came in at $20.1 billion in the same year.
“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,” said JPMorgan analysts.
Right strategy?
But Sea’s decision to ramp up investments is likely to impact earnings, said JPMorgan. The bank downgraded Sea’s rating from “overweight” to “neutral” with a price target of $40.50, representing 2.56% upside from the stock’s Thursday close 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,” said 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 technology research at DBS Bank, is bullish on Sea. The firm has a price target 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,” said Mittal.
But TikTok Shop is “not such a large threat” to Shopee, he said.
“TikTok doesn’t have in-house logistics. They use third-party players to provide e-commerce packages,” Mittal said on CNBC’s “Squawk Box Asia” on Wednesday. Unlike TikTok Shop, Shopee and Lazada have their own logistics networks of warehouses and fulfilment centers around the world.
“This is one of the ways to compete with TikTok. TikTok is still very small. It’s not such a large threat,” said Mittal. TikTok Shop’s current GMV is only a fraction of Shopee and Lazada’s.
— CNBC’s Michael Bloom contributed to this report.
Source link: https://www.cnbc.com/2023/08/18/seas-growth-pivot-stems-from-e-commerce-competition.html