Nanofilm and Sea: Tale of two tech stocks with diverging fortunes after results release

LOCALLY-LISTED tech manufacturer Nanofilm Technologies and New York-listed e-commerce and gaming giant Sea share some obvious similarities.

Both these Singapore companies have China-born founders. Since going public, the two companies have seen their shares soar. And, during their latest financial reporting period, both companies turned in higher revenues compared to the previous year but lower net profit.

One big difference between the two companies: investors did not seem to mind the weaker profitability at Sea but punished Nanofilm severely.

Market reaction

Nanofilm shares plunged last week, sinking 28.8 per cent last Monday, and falling a further 10.1 per cent on Tuesday to close at S$3.82, the lowest it has been in 2021.

The stock has since rebounded to S$4.14, but that's still 30.7 per cent below where it was prior to recent results release.

On Aug 13, Nanofilm said its revenue for H1 2021 increased 24.2 per cent year on year to S$96.6 million. Its net profit declined 3.1 per cent to S$17.9 million, amid supply chain disruptions, change in revenue mix to lower margin products, and also expenses relating to its new plant in Shanghai.

Nanofilm also announced on the same day the departure of another senior executive - the second in as many months - which probably spooked investors.

On the other hand, Sea shares have soared after it reported its Q2 2021 results. On Aug 17, after its results were released, the counter gained 6.1 per cent. Over the two following days, it leapt as much as 6.5 per cent to touch a record high of US$328.35. Sea closed at US$309.33 on Friday.

Sea reported revenue of US$2.28 billion for Q2 2021, more than twice its revenue for Q2 2020 and ahead of analysts' estimates. Its gross profit of US$930.9 million was also more than four-times Q2 2020, but Sea still posted a 10.2 per cent wider net loss of US$433.7 million.

Sea's adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) for Q2 2021 was negative US$24.1 million, versus a positive US$7.7 million in Q2 2020.

The company's digital entertainment segment, which includes its hit game Free Fire, reported adjusted Ebitda of US$740.9 million, up nearly 70 per cent. But Sea's other business segments - including its e-commerce platform Shopee - recorded wider adjusted Ebitda losses.

Great expectations

On the face of it, investors have been very forgiving of the red ink at Sea.

Over the course of 2020, Sea has seen its shares surge fivefold. Since the beginning of 2021, its shares are already up 55 per cent.

The counter, which has been included in the MSCI Singapore index, has a market capitalisation that now exceeds the combined market value of the three local banks.

The big driver of Sea's market value appears to be its revenue growth. Indeed, its Q2 2021 revenue exceeded consensus estimates by 5 per cent, according to Bloomberg data. Sea has also raised guidance for the digital entertainment and e-commerce segments the full year.

Analysts did not even seem to mind that Sea's Q2 2021 net loss was 16 per cent greater than the US$373.6 million loss they were expecting. Since the results, the consensus target prices for Sea has been raised to US$357.51 from US$321.71, Bloomberg data showed.

Investors were also expecting great things from Nanofilm when it listed in October last year after an initial public offering at S$2.59 per share. In July, the stock reached a peak of S$6.53, which reflected a trailing price-to-earnings ratio of 61.4 times.

The big difference versus Sea, however, is that Nanofilm did not meet the market's expectations.

According to Bloomberg data, consensus estimates for Nanofilm's FY21 revenue before the recent results release was S$311.6 million, representing on-year growth of over 40 per cent. Net income was expected to also grow 47 per cent to S$84.9 million for the full year.

The 24 per cent rise in H1 2021 revenue was clearly below expectations, and the slight dip in net profit quickly doused investor enthusiasm.

Nanofilm's announcement on the same day that its chief operating officer was leaving - just two months after the chief executive's resignation was announced - did not help investor confidence.

Already, some analysts have downgraded their earnings estimates and target prices for the counter.

The road ahead

While there are some similarities between the two companies, there are also many obvious differences - not least the type of technologies they are dealing with, the scale of their operations, and even the markets in which they operate.

Looking ahead, both stocks seem likely to continue drawing strong investor interest, given their potential for delivering strong growth.

Natural questions would be whether Sea's share price can be sustained, and how long would it take before investors demand the company shows positive earnings.

For Nanofilm, investors will probably want to see firmer evidence of its ability to keep growing its top and bottom lines strongly to be convinced that the H1 results may have just been a blip.

Investors should keep in mind that fast-growing companies often deliver uneven performance.

For instance, wealth management platform iFast Corporation saw its shares tumble 31 per cent to S$2.69 after news broke last December that it did not get a digital banking licence in Singapore. Since then, however, the stock has more than trebled in value, supported in part by the company's strong revenue and earnings growth prospects.