For Southeast Asian tech large Sea Ltd, 2023 has been a yr of contradictions. After posting huge losses for a very long time, Sea truly grew to become worthwhile this yr. By the primary 9 months of 2023, Sea reported net income of $274 million, which is a substantial enchancment in comparison with its $2 billion web loss over the identical time interval in 2022.
And but, the inventory has dropped all year long and is at present hovering round $35 a share. On the peak of the inventory market’s wild run in 2021, Sea was buying and selling at over $350 a share though it’s extra worthwhile now. Why are buyers punishing Sea for being worthwhile?
Welcome to the upside-down world of tech firms and their market valuations. The market typically values tech firms primarily based on expectations of what they are going to in the future be, versus what they’re doing proper now. Tesla, famously, has a better valuation than one may anticipate primarily based on its precise earnings.
And Sea isn’t any totally different. When it debuted on the New York Stock Exchange in 2017, the thought was that Sea would occupy a crucial place in Southeast Asia’s quickly rising digital financial system in the future, and buyers have been shopping for into the worth that this future market dominance would generate. Now the inventory is being pummeled as a result of buyers are apparently dropping confidence in Sea’s capacity to take care of and broaden that market share.
Sea’s digital gaming arm has been its primary earner, particularly throughout the pandemic. Though it stays worthwhile, income is down and progress in energetic every day customers has stagnated. In the meantime, the gross merchandise worth of transactions on Sea’s e-commerce platform, Shopee, elevated by 5 p.c within the third quarter of 2023 in comparison with a yr in the past. 5 p.c yr over yr progress just isn’t dangerous by most requirements, however buyers in all probability anticipate Shopee to develop sooner than that.
Whereas e-commerce and digital leisure could be under-performing market expectations, Sea’s digital banking actions are literally rising quickly and creating wealth. By September 2023, Sea’s digital finance enterprise had $2.4 billion in loans excellent, and earned a web revenue of $150 million within the third quarter.
However that hasn’t been sufficient to placate buyers, particularly as the corporate posted a web loss within the third quarter and CEO Forrest Li indicated Sea would pivot back toward growth, even when it harm the underside line. Whereas a number of the right-sizing of Sea’s valuation can be as a consequence of rising rates of interest shifting funding out of inventory markets, it does trace at a bigger disillusionment with the promise of Southeast Asia’s once-vaunted tech unicorns.
Traders are equally skeptical of Indonesia’s GoTo, one other tech large anticipated to play a pivotal function within the area’s digital financial system. The story for GoTo via the primary three quarters of 2023 is that it’s nonetheless dropping numerous cash ($620 million) however dropping lower than it did in 2022 ($1.35 billion). But whilst GoTo reduces its losses and incrementally strikes towards profitability, it faces the same hurdle as Sea which is stagnating progress.
In September 2023, GoTo reported annual customers during the last twelve months had decreased by 21 p.c in comparison with a yr earlier. The worth of transactions on Tokopedia, GoTo’s e-commerce platform, is down 11 p.c within the third quarter. Losses are narrowing primarily as a result of GoTo, like Sea, has been reducing again on bills and trying to optimize income from its present person base.
By the primary 9 months of 2023, GoTo lowered spending on advertising and marketing by 57 p.c in comparison with the earlier yr. Sea additionally minimize advertising and marketing bills by $983 million, a 35 p.c lower. To make buyers pleased, it appears these firms are anticipated to chop prices, together with advertising and marketing. However doing so makes it troublesome for them to develop as quickly as they as soon as did.
Tech platforms like Shopee, Gojek, and Tokopedia have been imagined to be game-changers. By leveraging expertise and cell phone penetration, they have been set to revolutionize the best way we purchase and promote issues. And I feel these companies have completely been a web optimistic for an financial system like Indonesia’s, which faces excessive transaction prices. Small companies can deliver merchandise to a wider market now utilizing Gojek, Shopee, or Tokopedia than they might earlier than, and getting a primary service like transportation has develop into immensely simpler and extra environment friendly.
However having these companies serve a market coordination operate, whereas additionally being worthwhile and rising in the best way buyers anticipate them to, has confirmed to be a tough needle to string. It seems, facilitating market exercise just isn’t a very worthwhile enterprise. For this reason, as an example, many public brick-and-mortar markets in Jakarta and different cities all through Indonesia are owned by native governments and aren’t operated for revenue, however as a public service. Tech promised to reinvent {the marketplace} in new and modern methods, however thus far we’re nonetheless ready to see if the promise can stay as much as the hype.
