New competition from TikTok in Indonesia sparked a downgrade for Sea Limited (SE 0.05%) stock on Monday, sending shares of the Singaporean e-commerce giant spiraling 7% lower through 10 a.m. ET.
As Reuters reported this morning, TikTok is trying to reenter the Indonesian e-commerce market by taking over local tech company GoTo's e-commerce business, Tokopedia. Shares of Sea Limited, which receives 67% of its annual revenue from Southeast Asia in general (and does 35% of its gross merchandise volume in Indonesia in particular), are suffering in response to this news.
The TikTok deal
TikTok was forced to close its own TikTok Shop e-commerce business in Indonesia in September after the nation passed a law banning online shopping via social media platforms, but TikTok couldn't stay away. This morning the company announced it will buy 75% of GoTo's Tokopedia for $840 million, and then invest hundreds of millions of dollars more building out the e-commerce business -- growing its total investment to $1.5 billion.
By "combining Tokopedia's strong local presence with TikTok's mass market reach and technological prowess," said GoTo CEO Patrick Walujo, TikTok will create a new "Indonesian e-commerce champion."
In the process, it will pose a clear and present danger to a big part of Sea's business.
Is it time to panic about Sea Limited stock?
Worries over competition from TikTok inspired a bit of panic in Singapore this morning, with local Singaporean bank DBS downgrading Sea shares to a hold rating and cutting its price target to $42 a share. At the same time, however, Loop Capital in the U.S. raised its price target on Sea stock, to $43, arguing the stock is worth 10 times 2025 earnings before interest, taxes, depreciation, and amortization (EBITDA) -- and potentially even more. And I have to say, I'm inclined to agree with Loop on this one.
On the one hand, Sea Limited stock looks a little pricey today at a bit more than 22 times free cash flow and 33 times trailing earnings. However, analysts have been forecasting that Sea's earnings will triple over the next two years. Even if competition from TikTok takes some of the edge off that growth rate -- which isn't a given at this early date -- it still seems fast enough to me to justify at least a mid-20s multiple to free cash flow.
Long story short, if I were in the market for some Sea Limited shares this morning, I'd be looking at today's sell-off as an opportunity to buy into a growth stock on the cheap -- and not a reason to panic.
