What happened
For most of September, shares of Sea Limited (SE 0.05%) drifted lower along with the S&P 500. That was until the final week of the month, when it suddenly jumped, finishing 16.8% higher in September, according to data provided by S&P Global Market Intelligence. That crushed the negative 5% return for the S&P 500.
Investors were celebrating a new challenge for social media company TikTok, a key competitor to Sea's e-commerce business Shopee. Indonesia has reportedly banned e-commerce transactions for social media apps and given them one week to comply, as reported by Reuters. That deadline is this week.
TikTok and other social media companies must either separate e-commerce efforts into stand-alone apps or risk having their platforms shut down.
So what
Sea has struggled in recent quarters, and investors were giving up on the company because of rising competition. In the second quarter of 2023, 68% of the company's revenue came from its e-commerce operations; the rest came from video games and financial technology. This shows the importance of e-commerce for Sea and explains why investors were worried about competition.
Investors were perhaps most concerned about competition from TikTok in Indonesia because of the social media platform's grip in that market. With over 100 million users, Indonesia is TikTok's second largest adult audience in the world. And according to website The Information, TikTok Shop was tracking toward being a $6 billion business this year -- this is a ton of business potentially up for grabs.
It's important to note that Sea's management already believed it was finding success with e-commerce in Indonesia. It had incorporated livestreaming features into its Shopee platform. And in one recent livestreaming event, the platform saw 12 times as many transactions as in a normal day.
Sea's management was quick to call out the social aspect of its Shopee platform, seemingly reassuring investors that it was keeping pace with top rival TikTok.
Analysts don't seem to believe that the Shopee platform will be affected by Indonesia's ban, which is why Sea stock crushed the market in September.
Now what
I think investors can look at this in terms of competitive advantage. In e-commerce, third-party sellers naturally want to go where they can get the greatest exposure. That's been TikTok up until now for Indonesian merchants. But with the ban set to happen, these sellers could already be moving over to the second biggest player, Sea's Shopee -- it's a better choice compared to smaller rivals.
Still growing and profitable, Sea stock is a good one to bet on for a rebound. And if it's the primary beneficiary of TikTok's challenges in Indonesia, the stock could rebound in a hurry.
