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

Shares of Southeast Asian tech elephantine Sea plummeted this week aft missing gross expectations and saying it would absorption connected maturation implicit profits — a reversal from caller cost-cutting measures successful the look of economical uncertainty. But analysts said the pivot is simply a determination to support marketplace share.

On Tuesday, the institution reported revenue that missed expert expectations, coming successful astatine $3.1 cardinal versus the $3.2 cardinal expected, according to a Refinitiv statement estimate.

While Forrest Li, Sea's president and radical CEO, said the institution has "achieved self-sufficiency" and is "now connected firmer footing," helium said Sea volition present "reaccelerate investments successful growth."

The banal plunged aft Tuesday's net report, ending the league 28% lower.

Just past year, Sea overhauled its concern to absorption connected profitability amid precocious ostentation and involvement rates. At the aforesaid time, investors were pressuring tech firms to determination toward profitability. Other determination tech giants similar GoTo and Grab slashed costs by conducting wide layoffs and reducing lawsuit incentives.

Sea's apical absorption gave up their salaries, portion the institution froze salaries for astir employees and paid retired little bonuses. Local media reported the institution laid disconnected much than 7,000 employees successful six months.

As a result, Sea posted affirmative nett income for the archetypal time successful the 4th fourth of 2022 and that fig has remained successful the achromatic since. Before that, Sea was mostly unprofitable, amassing billions of dollars successful losses since its inception.

"The bully quality for them is that they person built up benignant of a buffer to summation immoderate of its spending, with each of its segments present profitable," said Woo.

In particular, Li said the institution has "started, and volition continue, to ramp up our investments successful increasing the e-commerce concern crossed our markets." JPMorgan said those investments could instrumentality the signifier of costly shipping subsidies and discount vouchers.

"Given the weakening macro situation and expanding contention from Lazada and TikTok Shop, Sea astir apt did not person overmuch of a prime but to commencement spending to astatine slightest support its marketplace stock successful the region," said Jonathan Woo, elder probe expert astatine Phillip Securities Research.

Shopee remains the market leader successful the region, with a gross merchandise measurement of $47.9 cardinal successful 2022, according to a report from Momentum Works. Lazada's GMV came successful astatine $20.1 cardinal successful the aforesaid year.

"In our view, the pivot could beryllium driven by contention on with Sea positioning itself for an summation successful user spend, and to turn live-streaming and in-house logistics," said JPMorgan analysts.

But Sea's determination to ramp up investments is apt to interaction earnings, said JPMorgan. The slope downgraded Sea's standing from "overweight" to "neutral" with a terms people of $40.50, representing 2.56% upside from the stock's Thursday adjacent of $39.49.

"Sea's determination to accelerate ecommerce investments successful maturation is apt to materially measurement connected its net and stock terms successful the near-term," said JPMorgan.

"Sea could perchance incur dense investments successful 2nd fractional of 2023 (a engaged run period) resulting successful net diminution successful 2nd half."

Sachin Mittal, caput of telecom, media and exertion probe astatine DBS Bank, is bullish connected Sea. The steadfast has a terms people of $90 for Sea, representing astir 160.9% upside.

"Defending your marketplace stock is the close strategy successful e-commerce. You don't privation to springiness a ft successful the doorway to the caller player. That's what we deliberation Sea's doing," said Mittal.

But TikTok Shop is "not specified a ample threat" to Shopee, helium said.

"TikTok doesn't person in-house logistics. They usage third-party players to supply e-commerce packages," Mittal said connected CNBC's "Squawk Box Asia" connected Wednesday. Unlike TikTok Shop, Shopee and Lazada person their ain logistics networks of warehouses and fulfilment centers astir the world.

"This is 1 of the ways to vie with TikTok. TikTok is inactive precise small. It's not specified a ample threat," said Mittal. TikTok Shop's existent GMV is lone a fraction of Shopee and Lazada's.

— CNBC's Michael Bloom contributed to this report.