Marine’s growth at the expense of profits is driven by e-commerce competition

Forrest Lee, CEO of Sea Ltd., in Singapore, Wednesday, May 3, 2023.

Ore Huiying | Bloomberg | Getty Images

Shares of the Southeast Asian technology giant the sea fell this week after it missed revenue expectations and said it would focus more on growth than profits – a reversal of recent cost-cutting measures in the face of economic uncertainty. But analysts said it was a move to protect market share.

On Tuesday, the company reported revenue of $3.1 billion, missing analysts’ expectations and the $3.2 billion expected, according to the Refinitiv consensus estimate.

Sea’s chairman and group CEO Forrest Lee said the company had “achieved self-sustainability” and was “now on a firmer footing”, but said Sea would now “accelerate investment in growth”.

Shares fell after Tuesday’s earnings report, ending the session down 28%.

Just last year, Sea overhauled its business to focus on profitability amid high inflation and interest rates. At the same time, investors have been pressuring tech firms to move toward profitability. Like other regional tech giants to go and Catch cut costs by making massive layoffs and reducing customer incentives.

Sea’s top management waived salaries, the company froze the salaries of most employees and paid fewer bonuses. Local media reported that the company fired more than 7,000 employees in 6 months.

Protecting your market share is the right strategy in e-commerce. You don’t want to get your foot in the door for a new player. We think the sea does.

Sachin Mittal

Head of telecommunications, media and technology research at DBS Bank

As a result, Deniz posted positive net income for the first time in the fourth quarter of 2022, and the figure has remained in the black ever since. Prior to that, Marine was largely unprofitable and accumulated billions of dollars in losses since its inception.

“The good news for them is that they’ve kind of built a buffer to raise some of their costs, all of their segments are now profitable,” Woo said.

Enhancing e-commerce

In particular, Li said the company has “started and will continue to increase our investment to develop e-commerce business in 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 had little choice but to start spending, at least to protect its market share in the region,” said Jonathan Woo, senior research analyst at Phillip Securities. Research.

Sea’s decision to accelerate its e-commerce investments for growth is likely to have a significant impact on its earnings and share price in the near term.

According to a report by Momentum Works, Shopee remains the market leader in the region with a total trade volume of $47.9 billion in 2022. Lazada’s GMV reached $20.1 billion that year.

JPMorgan analysts said: “The bottom line, in our view, could be driven by competition along with increased consumer spending, live streaming and an offshore position to develop inland logistics.”

The right strategy?

But Sea’s decision to increase investments is likely to weigh on earnings, JPMorgan said. The bank cut Sea from an “overweight” rating to a “neutral” rating with a $40.50 price target, indicating a 2.56% upside from the stock’s $39.49 close on Thursday.

“Sea’s decision to accelerate its e-commerce investments for growth is likely to have a material impact on its earnings and share price in the near term,” JPMorgan said.

“Marine could potentially experience heavy investment in the second half of 2023 (a busy campaign period), resulting in lower earnings in the second half.”

Sachin Mittal, DBS Bank’s head of telecom, media and technology research, is bullish on the sea. The firm has a $90 price target on Deniz, which implies a potential upside of about 160.9%.

“Protecting your market share is the right strategy in e-commerce. You don’t want to give a new player a foot in the door. We think Sea is doing that,” Mittal said.

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

“TikTok doesn’t have internal 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 warehouse networks and fulfillment centers around the world.

“This is one way to compete with TikTok. TikTok is still very small. It’s not that big of a threat,” Mittal said. TikTok Shop’s current GMV is only a fraction of that of Shopee and Lazada.

— CNBC’s Michael Bloom contributed to this report.

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