Sell-offs show tech players’ pursuit of profitability not enough to win over investors
IT HAS been 17 months since Sea became the first big regional tech player to lay out plans for profitability.
The US-listed company in September 2022 pledged to achieve positive cashflow in order to prevail in an era of rising interest rates, high inflation and a volatile market that battered tech stocks.
Since then, other tech companies including Grab and GoTo have set profitability targets – and hit them. Yet, their journeys have shown that it takes more than profits to convince investors of their money-making potential.
Since 2022, the “growth-at-all-costs” approach beloved by tech companies has been put to shame, as investors realised that money was no longer cheap. But it does not mean they are ignoring growth – in fact, market reactions to tech earnings suggest that the bar is high for both profitability and growth.
Shares of Grab, which operates on-demand and financial services, slid the most in more than nine months on Feb 22 despite the company reporting its first profitable quarter.
Its management made the caveat that the Q4 net income was partly due to a one-time accounting gain. Even then, investors were likely spooked when the revenue forecast for this year came in below analyst estimates.
Grab expects revenue to rise 14 to 17 per cent to between US$2.7 billion and US$2.75 billion, below an average analyst projection of US$2.8 billion. Its shares fell 8.4 per cent after the results were released, overshadowing the announcement of a US$500 million share buyback.
Fundamentally, though, Grab’s core businesses have displayed decent growth. Its adjusted Ebitda (earnings before interest, taxes, depreciation and amortisation) margin and take rate have been climbing steadily for the past eight quarters, suggesting better profitability and efficiency from operating at scale.
But its topline growth is at its slowest in years. And in an environment where every dollar counts, investors are betting on companies’ ability to quickly grow market share while remaining financially sustainable.
Grab has assured investors that it expects revenue to ramp up from next year as new product initiatives gain traction. But these initiatives, spanning online lending to digital banking, are still a source of uncertainty for investors.
Similar to Grab, Internet group Sea suffered a historic 29-per-cent, single-day share price drop in August, despite having turned in its third profitable quarter in a row. The company missed revenue forecasts, and its e-commerce growth slowed down.
Sea’s e-commerce platform, Shopee, is under threat from the wildly popular social media app, TikTok. Coupled with a gaming arm that has yet to produce another hit game, Sea has had to reckon with a stable of investors that were losing confidence in its stock.
Since the start of the year, though, the stock has rallied about 40 per cent as tensions eased. It rose another 5.6 per cent on Monday (Mar 4) after the group announced the first profitable year in its history.
Sea booked earnings of US$162.7 million for 2023, reversing from a loss of US$1.7 billion in 2022. Revenue for the period rose 4.9 per cent to US$13.1 billion, exceeding analysts’ forecasts of US$12.9 billion.
Furthermore, the company’s management expects Shopee to break even on an adjusted basis by the second half of the year.
Still, the stock experienced wild price swings following the results. Sea’s share price sprang 13.1 per cent on Monday, and then plunged 13.6 per cent into the red.
Investors’ initial fiery enthusiasm was likely chilled by continued uncertainty over competition in the core e-commerce business, despite Sea’s stronger set of results.
As South-east Asia’s biggest tech companies chart their path to sustained profitability, they will need to convince investors that their businesses are worth backing in the long run. Shopee’s market leadership, for instance, has failed to quell fears that TikTok Shop may soon upend the e-commerce landscape.
These companies will have to navigate the tough challenge of balancing profitability – or healthy margins – while continuing to maximise long-term growth for each dollar invested.
GoTo, which struck a deal with TikTok for e-commerce in Indonesia, said in January that it booked its first positive Ebitda. It did not disclose specific figures, and has yet to officially announce its results, which will give a better sense of whether growth has been hit.
When it does release its earnings, it will be worth watching out for how the market reacts.
