nuttapong
J.P. Morgan upgraded Sea's (NYSE:SE) stock to Overweight from Neutral noting that earnings outlook would be volatile but it is currently on an upswing.
The firm also raised the price target on the shares to $70 from $43.
In the current competitive environment, Sea is likely to continue increasing commissions while reducing the intensity of sales and marketing spend, said a team of analysts led by Ranjan Sharma.
However, Sharma believes that the high take-rates could result in volatility in earnings expectations with changes in the competitive environment. Volatility in earnings outlook is likely to result in volatility in share price.
The analysts recommend investors to trade these changes in earnings outlook. They believe earnings expectations are likely to see positive revisions in the near-term, steered by ecommerce. Thus, they upgraded the stock to Overweight.
On Monday, Sea reported its fourth quarter results which beat estimates.
Sharma noted that in this competitive environment, Shopee has raised marketplace and mall commissions in Malaysia by 400 basis points, or bps. In their view, Sea could increase commissions in other countries in Association of Southeast Asian Nations, or ASEAN, (mainly, the Philippines and Thailand). The higher revenues could fund their sales and marketing spend, which could also reduce in intensity in the current competitive environment.
The analyst expects swift improvement in ecommerce profitability, and increased his FY25E adj EBITDA forecast for Shopee by about 100% to $1.1B.
Despite gaming quarterly active users declining 15M quarter-over-quarter and relatively stable gross bookings, Sea has guided to Free Fire gamers and gross bookings to increase by double digits in 2024. The outlook is potentially indicative of inflection in gaming earnings in 2024 despite the 7% quarter-over-quarter decline in gaming adj EBITDA in the fourth quarter of 2023.
Sharma and his team have increased their FY25E adj. EBITDA forecast by 23%, driven mainly by ecommerce. They increased their ecommerce valuation, steered by higher earnings and increase in EBITDA multiple to 20x from 10x previously.
"While many believe the increasing take-rates are positive for SE's earnings, we believe these could result in a high degree of volatility in earnings expectations," Sharma and his team said in a research note.
In their view, the high take rates increase the propensity for sellers to look for alternative platforms, which offer better margins. Thus any platform investing to increase traffic could find willing merchants to join their platform and their campaigns.
With Sea continuing to focus on market share, the analysts think it might have to respond by increasing sales and marketing initiatives to generate traffic from buyers. The company's earnings outlook has already seen a high degree of volatility. With the volatility in earnings expectations, Sea's share price could remain highly volatile. The earnings volatility could reduce if the company is able to differentiate its service with an infrastructure-driven competitive moat, according to the analysts.
Sea's (SE) has a Hold rating at Seeking Alpha's Quant Rating system, which consistently beats the market. Meanwhile, the Seeking Alpha authors' average rating is more positive with a Buy and so is the average Wall Street analysts' rating, Buy.