We’ve written about our positive view on technology in the near term, given expectations around interest rates/bond yields nearing a peak (although that certainly wasn’t the case overnight with US 2-year yields up 13bps to trade above 5%). A stock that caught our eye overnight was Sea (SE US) which beat very dire expectations from analysts and rallied ~20% in the process. These sorts of moves are becoming commonplace for beaten-up technology stocks that have a real business and are turning the dial on profitability. While this (and many others) were not worth the multiple they traded on in 2021, it seems to us that in some cases, pessimism has become simply too high, creating an opportunity.
For those not familiar, Sea is the largest internet conglomerate in Southeast Asia, has a market capitalisation of $65bn (nearly the size of ANZ) with leading positions in gaming, e-commerce and financial services. They started back in 2009 with a few key milestones along the way including an e-wallet solution they started in 2014 and a very popular self-developed game Free Fire, which has achieved huge popularity and expanded Sea’s presence in India and LATAM – which are clearly big markets.
However, what caught our eye overnight was their ability to turn profitable very quickly by reducing their spend on R&D and marketing. While this will have an ultimate impact, this is a trend that is playing out right across the IT space (Atlassian just announced a 5% reduction in headcount) and is a clear sign of what comes next in the space. Those bigger, dominant businesses that can tweak their operations to target profitability will be the ones to recover strongly.
