For Southeast Asian tech giant Sea Ltd, 2023 has been a year of contradictions. After posting big losses for a long time, Sea actually became profitable this year. Through the first nine months of 2023, Sea reported net income of $274 million, which is a considerable improvement compared to its $2 billion net loss over the same time period in 2022.
And yet, the stock has dropped throughout the year and is currently hovering around $35 a share. At the peak of the stock market’s wild run in 2021, Sea was trading at over $350 a share even though it is more profitable now. Why are investors punishing Sea for being profitable?
Welcome to the upside-down world of tech companies and their market valuations. The market often values tech companies based on expectations of what they will one day be, as opposed to what they are doing right now. Tesla, famously, has a higher valuation than one might expect based on its actual earnings.
And Sea is no different. When it debuted on the New York Stock Exchange in 2017, the idea was that Sea would occupy a critical position in Southeast Asia’s rapidly growing digital economy one day, and investors were buying into the value that this future market dominance would generate. Now the stock is being pummeled because investors are apparently losing confidence in Sea’s ability to maintain and expand that market share.
Sea’s digital gaming arm has been its main earner, especially during the pandemic. Although it remains profitable, revenue is down and growth in active daily users has stagnated. Meanwhile, the gross merchandise value of transactions on Sea’s e-commerce platform, Shopee, increased by 5 percent in the third quarter of 2023 compared to a year ago. Five percent year over year growth is not bad by most standards, but investors probably expect Shopee to grow faster than that.
While e-commerce and digital entertainment might be under-performing market expectations, Sea’s digital banking activities are actually growing rapidly and making money. By September 2023, Sea’s digital finance business had $2.4 billion in loans outstanding, and earned a net profit of $150 million in the third quarter.
But that hasn’t been enough to placate investors, especially as the company posted a net loss in the third quarter and CEO Forrest Li indicated Sea would pivot back toward growth, even if it hurt the bottom line. While some of the right-sizing of Sea’s valuation is also due to rising interest rates shifting investment out of stock markets, it does hint at a larger disillusionment with the promise of Southeast Asia’s once-vaunted tech unicorns.
Investors are similarly skeptical of Indonesia’s GoTo, another tech giant expected to play a pivotal role in the region’s digital economy. The story for GoTo through the first three quarters of 2023 is that it is still losing lots of money ($620 million) but losing less than it did in 2022 ($1.35 billion). Yet even as GoTo reduces its losses and incrementally moves toward profitability, it faces a similar hurdle as Sea which is stagnating growth.
In September 2023, GoTo reported annual users over the last twelve months had decreased by 21 percent compared to a year earlier. The value of transactions on Tokopedia, GoTo’s e-commerce platform, is down 11 percent in the third quarter. Losses are narrowing mainly because GoTo, like Sea, has been cutting back on expenses and looking to optimize revenue from its existing user base.
Through the first nine months of 2023, GoTo reduced spending on marketing by 57 percent compared to the previous year. Sea also cut marketing expenses by $983 million, a 35 percent decrease. To make investors happy, it seems these companies are expected to cut costs, including marketing. But doing so makes it difficult for them to grow as rapidly as they once did.
Tech platforms like Shopee, Gojek, and Tokopedia were supposed to be game-changers. By leveraging technology and mobile phone penetration, they were set to revolutionize the way we buy and sell things. And I think these firms have absolutely been a net positive for an economy like Indonesia’s, which faces high transaction costs. Small businesses can bring products to a wider market now using Gojek, Shopee, or Tokopedia than they could before, and getting a basic service like transportation has become immensely easier and more efficient.
But having these firms serve a market coordination function, while also being profitable and growing in the way investors expect them to, has proven to be a tricky needle to thread. It turns out, facilitating market activity is not a terribly profitable undertaking. This is why, for instance, many public brick-and-mortar markets in Jakarta and other cities throughout Indonesia are owned by local governments and are not operated for profit, but as a public service. Tech promised to reinvent the marketplace in new and innovative ways, but so far we are still waiting to see if the promise can live up to the hype.