Market’s contrasting reactions to Grab’s and Sea’s financials show that growth alone is not enough

SOUTH-EAST Asian tech giants Grab and Sea both recently announced their financial results for the second quarter ended June 2024. But market reactions to their earnings calls tell very different stories.

Shares of gaming and e-commerce player Sea have surged 23.7 per cent to US$82.81 as at Aug 26 since its results announcement on Aug 13, as it beat analysts’ consensus on top line and net profit to return to profitability in Q2.

The group also revised its guidance for e-commerce arm Shopee’s full-year gross merchandise value growth upwards to mid-20 per cent, from high teens previously.

A couple of external factors have helped Sea during this quarter. Notably, its e-commerce rivals have turned down the heat and are looking to improve take rates.

TikTok Shop, Shopee’s fiercest competitor in the region, appears to be focused on return on investment and profitability after acquiring a majority stake in Indonesian e-commerce player Tokopedia.

Its other e-commerce rival, Lazada, recently announced that it has hit positive adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) for the first time.

These have helped Sea reduce its e-commerce adjusted Ebitda loss to just US$9.2 million for the quarter – lower than analysts’ forecast of a US$21.2 million loss.

Looking ahead, advertising appears to be the way for e-commerce to improve its top and bottom line contributions.

Shopee has seen the number of sellers who pay for ads increase 20 per cent year on year. A dedicated team has been deployed to work on improving the ad-feeding algorithm for higher returns for sellers.

Increased ad take rates are expected to benefit Sea; importantly, this is expected to happen within the next few quarters rather than years. This has led Sea founder Forrest Li to guide for the segment to hit positive adjusted Ebitda in the third quarter.

Sea has been profitable before, and it has a track record to prove that it can be serious about reaching profitability.

Changing gears to focus on growth has cemented Shopee’s dominant position as it beats out rivals in the e-commerce space. And it now reaps the benefits even as its rivals rationalise in the space.

Over at Grab, the growth story is markedly different.

Shares of Grab have fallen 3.9 per cent to US$3.24 as at Aug 26, after the technology group announced on Aug 14 that it missed analysts’ estimates for Q2, despite narrowing losses.

To be sure, Grab is still focused on growth; its strategy is to have more affordable offerings in an effort to grow its total addressable market.

This has led to lower adjusted Ebitda margins for its mobility segment, but Grab’s management said this was still within expectations.

Grab’s mobility Ebitda is expected to improve in subsequent quarters, and it appears to be on the way to becoming profitable.

However, Grab has kept its revenue guidance for FY2024 unchanged at US$2.7 billion to US$2.75 billion.

Meanwhile, the management has indicated that the company could hit the higher end of the adjusted Ebitda guidance range of US$250 million to US$270 million.

But a couple of setbacks have impacted Grab’s plans.

One of these is the pulling out of plans to acquire Singapore taxi operator Trans-cab, after the Singapore competition watchdog raised concerns over diminished competition from the acquisition.

This means that Grab will continue to grapple with a driver supply crunch in Singapore, even as rivals such as Tada persist in competing for market share.

In the financial services segment, Grab is making good headway with all three digital banks now launched in Singapore, Malaysia and Indonesia.

But with the management forecasting the break-even point for all digital banks to be no later than the end of 2026, it is a faraway target for investors to shoot for.

Compared to Sea, investors are more likely to be cautious on Nasdaq-listed Grab, which has missed analysts’ consensus on revenue.

Grab also lacks the track record of consistently being in the black. Its last profitable quarter was in Q4 2023, and was due in part to a reversal of an accounting accrual no longer being required.

Both Sea and Grab talked up macroeconomic tailwinds that could drive up top and bottom line growth during their earnings calls. But in a world of uncertainty, it appears that investors are now looking for more than just growth.