By Megha Mandavia
These days, profit is often the thin green line dividing loved and unloved tech shares.
That makes sense in saturated e-commerce markets such as the U.S. But firms that retrench now in places like Southeast Asia, where e-commerce penetration is still relatively low, risk losing out to competitors that are able to grin and bear losses -- even in a tough market environment.
The diverging strategies -- and market performances -- of two big Southeast Asian tech firms may prove to be an interesting test case.
Shares of e-commerce and games company Sea Ltd. have risen 14% since it reported its first ever quarterly profit last week, according to FactSet. In comparison, shares of loss-making mobility app Grab Holdings are down 18% since its latest earning results in February -- despite the firm's new forecast that it will move toward profitability sooner than previously expected.
Both stocks are worth only a fraction of what they were back in the heady days of 2021. But Sea has distinguished itself with a new, laserlike focus on profitability, even at the expense of growth. Revenue growth was 25% in 2022, versus 128% a year earlier. During the fourth quarter, it was just 7%. A higher take rate for Sea on its e-commerce marketplace -- 10.3% in the fourth quarter against 8.7% in the third, according to Bernstein Research -- and a cost-cutting drive helped tip the business into profitability, even with much slower growth.
In contrast, Uber-like Grab still forecasts revenue growth of 54-60% in 2023 and doesn't expect to become profitable on an adjusted earnings before interest, taxes, depreciation and amortization basis until the fourth quarter of 2023. Grab has also cut the incentives it pays to users such as drivers, merchants and consumers as a percentage of gross merchandise value sold, but hasn't deprioritized growth. The selloff in its shares -- even given a narrower loss last quarter -- reflects a risk averse market environment where investors have little tolerance for loss-making businesses, even in fast-growing markets such as Southeast Asia.
Sea's strategy, however, comes with its own risks.
Southeast Asia's long-term prospects remain bright. Given fast-growing incomes, a young population, and relatively low levels of e-commerce penetration, a pivot back to growth might not be too difficult when the interest-rate cycle peaks in the region. Consulting firm McKinsey in December put the average e-commerce penetration rate in Southeast Asia, excluding food and beverages, at just 20% against 47% in China.
Meanwhile though, Sea risks losing out to new competitors such as TikTok. TikTok, owned by the Chinese firm Bytedance, has already managed to take 3% of the e-commerce gross merchandise value in Southeast Asia according to Aletheia Capital, despite being a relative latecomer to the region.
Grab may therefore do better protecting its territory in the months ahead -- and be well placed when tourism in the region rebounds completely. According to Bernstein Research, gross merchandise value in Grab's mobility segment is still at 74% of pre covid levels. Bernstein is bullish on the company: Analyst Venugopal Garre thinks the company's business model will eventually deliver both growth and profitability.
Everyone likes profits -- especially when they are tough to come by in a down cycle. But firms that pivot away from growth too early might end up paying a steep price later on too, especially in markets with big structural growth tailwinds such as Southeast Asia.
Write to Megha Mandavia at megha.mandavia@wsj.com
(END) Dow Jones Newswires
March 14, 2023 09:04 ET (13:04 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.
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