Are Investors Becoming Disillusioned With Southeast Asias Tech Companies?

For the Southeast Asian technology giant Sea Ltd. 2023 was a year of contrasts. After a long period of huge losses, Sea was profitable this year. For the first nine months of 2023, Sea posted a net profit of $274 million, a significant improvement from its net loss of $2 billion in the same period in 2022.

However, shares have been falling throughout the year and are currently around $35 per share. At the height of the stock market boom in 2021, Sea traded at more than $350 per share, although it is now more profitable. Why are investors penalizing Sea for its profitability?

Welcome to the topsy-turvy world of technology companies and their stock valuations. The market often values ​​technology companies based on expectations of what they will be one day, rather than what they are doing today. Tesla is known to have a higher valuation than one would expect based on its current earnings.

And the sea is no different. When it debuted on the New York Stock Exchange in 2017, the idea was that Sea would one day hold a crucial position in Southeast Asia's fast-growing digital economy and that investors would buy the value that future market dominance would generate. Today, the stock is taking a hit as investors appear to be losing confidence in Sea's ability to maintain and grow that market share.

Sea's digital gaming division has been a big winner, especially during the pandemic. Although the company remains profitable, revenue is declining and daily active user growth is stagnating. Meanwhile, the total value of transactions on Sea Shopee's e-commerce platform increased 5% year-on-year in the third quarter of 2023. 5% year-over-year growth isn't bad by most measures, but investors are probably expecting Shopee to grow faster.

Although e-commerce and digital entertainment are not meeting market expectations, Sea's digital banking business is actually growing rapidly and generating revenue. As of September 2023, Sea's digital finance business had $2.4 billion in loans outstanding and generated a net profit of $150 million in the third quarter.

But that wasn't enough to reassure investors, especially after the company posted a net loss in the third quarter and CEO Forrest Lee suggested Sea would return to growth, even if it would hurt results. While part of Sea's valuation also reflects rising interest rates driving investment out of stock markets, it points to a general disenchantment with the once-touted promise of Southeast Asia's tech unicorns.

Investors are also skeptical of Indonesia's GoTo, another tech giant that is expected to play a major role in the region's digital economy. GoTo's history in the first three quarters of 2023 shows that the company is still losing a lot of money ($620 million), but less than it lost in 2022 ($1.35 billion). But even as GoTo trims its losses and moves toward profitability, it faces similar headwinds as Sea, whose growth has stagnated.

In September 2023, GoTo reported that annual user numbers over the past 12 months had fallen 21% year-over-year. The value of transactions on Tokopedia, GoTo's e-commerce platform, fell 11% in the third quarter. Losses are narrowing largely because GoTo, like Sea, has cut costs and sought to maximize revenue from its existing user base.

In the first nine months of 2023, GoTo reduced its marketing spending by 57% compared to the previous year. Sea also reduced its marketing spending by $983 million, a decrease of 35 percent. In order to please investors, these companies are apparently expected to reduce their costs, including marketing costs. However, this makes it difficult for them to grow as quickly as before.

Tech platforms like Shopee, Gojek and Tokopedia should be game changers. Using mobile insights and technology, they wanted to revolutionize the way we buy and sell things. I think these companies have been very positive for an economy like Indonesia that faces high transaction costs. Small businesses can now market their products to a larger market than ever before using Gojek, Shopee or Tokopedia, and using a basic service like shipping has become incredibly easier and more efficient.

However, getting these companies to coordinate the market while delivering the profits and growth expected by investors has proven difficult. It turns out that promoting market activity is not a very profitable business. For this reason, for example, many of the physical public markets in Jakarta and other Indonesian cities are owned by local governments and run not for profit but as a public service. Technology has promised to reinvent the market in new and innovative ways, but so far we are still waiting to see if the promise lives up to expectations.

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