• Sharp correction in internet stocks as market shifts its focus from just growth to profitability
  • Current market prices of Sea Ltd. (SE) & Grab (GRAB) imply too low margins in the long term, trading near our bear-case target prices   
  • GRAB is trading at a ~fair discount of 27% to SE but has more catalysts in place

Sharp correction in internet stocks as market shifts its focus to profitability. SE and GRAB have corrected ~50% from their peaks over the last two months. There is a shift in the market’s focus to profitability from market share gains as reflected in sharply lower revenue multiples (please see the side charts). Most business segments (except fintech) in Southeast Asia have a clear market leader and monetisation of leadership is the next logical step.

Current price of SE suggests long-term group EBITDA margins of ~17% vs our projection of ~26%. SE’s current enterprise value (EV) of ~US$80bn suggests group EBITDA of ~US$7bn by FY27F vs our projection of ~US$10bn EBITDA on ~US$40bn revenue. A key variance is possibly normalised e-commerce EBITDA margins of only 12% vs our projection of 22%. Typically, e-commerce market leaders secure 25-35% EBITDA margins whether its eBay in the US or Alibaba in China. SE is trading near our bear case valuation of US$147. The key overhang for SE is the lack of clarity on Shopee’s entry into new markets of India, Spain & Poland, which might lead to higher losses over the next 2-3 years.

Current price of GRAB suggests long-term group EBITDA margins of 11%, vs. our projection of 20%. GRAB’s current EV of ~US$14.5bn (net cash of US$7.5bn or US$1.90 per share) suggests group EBITDA of only US$1.1bn by FY27F, vs. our projection of US$2.0bn EBITDA on US$10bn adjusted revenue. Key variances could be (1) FY27F Delivery segmental EBITDA margins of only 5%, vs. our 17% projections and;(2) market is ignoring a potential rise in EBITDA from the Enterprise segment – advertising & cybersecurity services. GRAB is trading near our bear case valuation of US$5.60.  We believe GRAB’s mobility business should benefit from economic re-opening in the near-term.

GRAB is trading at a fair discount to SE. GRAB is trading at 4.4x FY22F adj revenue at a 27% discount to SE at 6.0x. We argue for GRAB to trade at a 25%-30% discount to SE due to superior margin potential of SE