TikTok partnership reduces GoTo’s burden, pressures Sea: analysts

The partnership between TikTok and GoTo will hurt Sea’s margin but relieve the Indonesian tech giant’s cash-burning burden, said analysts on December 11.

DBS Group Research has slashed the target price for Shopee owner Sea to US$42 from US$62 with a downgrade to “hold” from “buy.”

This was following the deal announcement, as the research house expects Shopee to suffer greater losses amid heightened competition in the ecommerce space.

DBS analyst Sachin Mittal revised down the forecasts of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of Sea’s ecommerce business. He expects losses for FY2024 to widen by 25.1% as compared to the previous estimate.

“We also delay the ecommerce adjusted EBITDA turnaround from FY2025 to FY2026,” Mittal added, noting that the EBITDA forecast for FY2025, at a loss of US$252 million, was revised into the red from black.

As a result, Mittal lowered the group earning forecasts down by 8.4% for FY2024 and 21.8% for FY2025.

He emphasized that the ecommerce competition will remain elevated in the next two years. While TikTok and Shopee grapple for market share in Southeast Asia, rivals Shein and Temu could also join the fight.

Citi Research, meanwhile, expects the negative impact on Shopee, which is already struggling for profitability, to be more severe than for other ecommerce peers such as Lazada.

It notes that TikTok’s initial US$1.5 billion commitment into the combined Tokopedia entity will force Shopee and Lazada to invest more into defending market shares, which puts pressure on their profit margins. However, Shopee faces a higher risk given the “lack of visibility on the effectiveness of recent investments.”

“We expect Sea’s share price to remain under pressure, with possible downside revisions to financial outlook in the coming quarters, if TikTok and Tokopedia prove to further pressure Shopee’s gross merchandise volume growth and market share,” said the Citigroup research house.

Similarly, Morningstar Equity Research expects Sea to face depressed margins and increased operating expenses in the medium term, as the group has indicated it will reinvest resources into Shopee to keep up with competitors.

The research house, at the same time, increased its fair value estimate for GoTo to 78 rupiah from 63 rupiah, as the deal is a loss-cutting move for the company.

Will this help or hurt GoTo?

Morningstar noted that Tokopedia, the ecommerce unit of GoTo, had “limited visibility” and is burdened with heavy cash burn.