Sea's chairman and group CEO Forrest Li informed investors on Tuesday that the company will "boost investments in growth," mainly in e-commerce. Not long ago, Sea revised its business plan to emphasize profitability due to high inflation and interest rates. "As we see it, the shift could be attributed to rivalry in addition to Sea preparing for an uptick in consumer expenditure, and for enlargement of live-streaming and in-house shipping," remarked JPMorgan analysts.
Sea's shares plummeted this week after the Southeast Asian tech giant posted lower-than-expected revenue and announced that it would prioritize growth over profits, a shift away from the cost-cutting initiatives they had adopted in the context of economic instability. Analysts, however, posited that the pivot is simply to defend market share. On Tuesday, Sea reported revenue that was $100 million shy of the Refinitiv consensus estimate of $3.2 billion. While Chairman and Group CEO Forrest Li asserted that the company has "attained self-sufficiency" and is "on more solid ground" now, he noted Sea will be "invigorating investments in growth". This explanation did not appear to satisfy the stock market as the company's share price closed 28% lower on Tuesday. Just last year, Sea had angled for profitability in response to inflation and rising interest rates, as well as the pressure from shareholders for tech companies to become profitable. GoTo and Grab, other regional tech giants, reduced costs drastically by eliminating jobs and curbing customer rewards. Sea's leadership, too, took pay cuts, while its employees experienced a wage freeze and reduced bonus payouts. Local media outlets reported that Sea had released over 7,000 employees in a six-month timespan.
Sea reported its first net income in the fourth quarter of 2022 and has stayed in the black since. Prior to that, enormous deficits had been incurred since its founding. Woo noted, "This means that Sea is in a strong financial position to expand its spending with all its divisions now profitable."
Li said the firm has "begun and will persist in increasing our investments into developing the e-commerce business across our markets." JPMorgan commented that these investments might be in the shape of costly delivery subsides and coupon codes. Taking into account the deteriorating macro climate and the expanded rivalry from Lazada and TikTok Shop, Jonathan Woo, senior research analyst at Phillip Securities Research, commented that Sea most likely did not have much of an alternative except to launch expenditure to at least retain its market share in the area.
TikTok Shop, the e-commerce arm of the renowned short video app, is rapidly expanding in Southeast Asia and presenting a challenge to Shopee and Lazada. In June, CEO Shou Zi Chew announced that the company would put billions of dollars into the region in the upcoming years to bolster its market presence. Lazada, owned by Alibaba, is striving to close the gap with Sea's Shopee, which is the dominant e-commerce platform in Southeast Asia since 2020.
Shopee is still the ruler of the market, Momentum Works indicating that its gross merchandise value was $47.9 billion in 2022. Lazada's GMV was $20.1 billion in the same period. JPMorgan analysts suggest that this shift is due to rivalry plus Sea getting ready for a surge in consumer spending, and to expand streaming services and home delivery.
JPMorgan 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. The bank cautioned that Sea's decision to step up its investments could negatively affect its earnings. They stated, "Sea's decision to increase spending in ecommerce in an effort to drive growth could significantly impact its earnings and share price in the short-term. Sea is expected to make considerable investments in the latter half of 2023 (a peak campaign season) which could lead to a drop in its earnings."
Sachin Mittal, who serves as the head of DBS Bank's telecom, media, and technology research, is optimistic about Sea's performance. The firm gave a price target of $90 for Sea, signifying an upside of roughly 160.9%. During an appearance on CNBC's "Squawk Box Asia" on Wednesday, Mittal stated that defending one's market share is a wise strategy in e-commerce, and believes that is what Sea is doing in response to the new player, TikTok Shop.
Mittal commented that TikTok Shop does not pose a large threat to Shopee and Lazada due to the fact that they are reliant on third-party logistics while Shopee and Lazada have their own networks of fulfilment centers and warehouses. He also noted that TikTok's GMV is currently a fraction of Shopee and Lazada's.
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