Sea Needs More Than Good Earnings to Sustain 175% Comeback Rally

(Bloomberg) -- After a peer-beating 175% stock rally from its January low, Southeast Asia’s top online-shopping company Sea Ltd. faces a high bar to impress investors with its upcoming third-quarter earnings report.

The Singapore-based firm is expected to deliver solid results next Tuesday, with its e-commerce arm Shopee moving into the black on an adjusted basis. Analysts forecast the value of goods sold by the division rose in the mid-20% range, in line with Sea’s guidance and confirming market expectations of easing competition with TikTok and Lazada.

With Sea’s US-listed shares trading at expensive levels, the market will be scrutinizing details on its profitability as well as efforts in live-steaming and games. The options market implies the stock could move 12% following the results.

Sea’s rally appears to have priced in strong revenue for the latest quarter, Morgan Stanley analysts including Divya Gangahar Kothiyal wrote in a note last month. Margins in the e-commerce business “may be lower than buy-side expectations, which may lead to the stock giving up some of the recent gains.”

Shopee has shown success this year in fending off rival services, from ByteDance Ltd.’s TikTok and Alibaba Group Holding Ltd.’s Lazada to Shein and PDD Holdings Inc.’s Temu. That’s helped Sea win back investors after a two-year decline in its share price.

The market is eager to see signs of reduced spending on costly promotions and discounts to stay ahead of the competition. Shopee hiked the fees it charges merchants in many core markets earlier this year, one move that may help improve its profitability.

Sea has also been investing in livestreaming as a means to help drive momentum in its e-commerce operation. Its digital entertainment business — which is leaning heavily on its Garena game platform’s hit title Free Fire — is expected to post a third-quarter revenue decline of 20% compared with a year earlier.

“We’re keen to see more evidence of commission rates rising, and less competitive intensity,” said Sat Duhra, a fund manager at Janus Henderson Group Plc. “Any visibility on livestreaming would be helpful, as they are growing but not yet profitable. Any update on new games to reduce reliance on Free Fire would be helpful too.”

With Sea’s big gain this year, it’s now trading at 22.9 times forward enterprise value to earnings before interest, taxes, depreciation, and amortization, above its three-year median level of 20.8 times. The Solactive E-commerce Index of global peers is at 10 times estimated EV to Ebitda.

Sea has helped power the MSCI Singapore Index to a 23% gain so far this year, outpacing the 13% rise in the Straits Times Index comprised solely of locally listed stocks. Still, the e-commerce firm’s American depositary receipts remain 74% below their pandemic-driven peak in 2021.

Duhra said his dividend-focused strategy holds shares in Sea even though it has a 0% yield. The stock can gain further on “any positive surprise” in the results, he said, adding that gains in China peers on expectations for a boost from stimulus could also help lift the Southeast Asian company’s shares.

“We feel this is a unique exposure,” he said. There is “plenty of choice for North Asia e-commerce names but nothing similar in Asean.”