Internet Sector: Is the EV-to-revenue metric dead?
- Sea Ltd (SE) is likely to turn EBITDA-positive in 2024; Grab Holding (GRAB) in 2025 at the earliest
- Prefer SE for a clearer path to profitability, and below 6x EV to five-year EBITDA valuation vs. its peers at 12-month forward EBITDA of 14x-30x; suggests 100%-400% upside potential in total over the next four years subject to execution risks.
- BUY SE with revised 12-month target price of US$126 (prev US$115), implying 46% upside potential. Our bear-case fair value for SE & GRAB is US$93 & US$2.14 respectively.
SE is likely to turn EBITDA-positive in 2024 vs -15% EBITDA margin in 2022F. Garena is seeing a stabilisation of its monthly user base since April 2022; it had declined sharply due to the India ban in Feb 2022. Our channel checks indicate that “Free Fire” is seeing a slower drop of only 2-3m users each month, which is more than offset by “Free Fire MAX” adding 4-5m users each month. Southeast Asia e-commerce is seeing less intense competition, as Tokopedia followed the commission rate hikes done by Shopee in Feb 2022.
GRAB is likely to turn adjusted EBITDA-positive at the earliest by 2025, vs. -72% adj EBITDA margin in 2022F. GRAB’s mobility segment to benefit from lower competition from Gojek in Singapore, coupled with rising demand for mobility across the region Food delivery is also seeing a less aggressive ShopeeFood in Indonesia, whose market share has been rather stable over the last three months.
We use normalised five-year EBITDA margins and EV/EBITDA multiples to derive our revised target prices. With small players facing a funding squeeze, large players with strong net cash positions should fare better in 2023/24 in our view. For our valuation, we use a conservative 12x FY27F EV/EBITDA discounted back by 10% each year. At SE, we project a conservative EBITDA margin of 17%, leading to FY27F EBITDA of US$8.6bn. E-commerce peers are trading at 14x-30x 12-month forward EV/EBITDA while projected EBITDA margins for Amazon, eBay, and PayPal in 2022 range from 14%-34%. For GRAB, we project a 12% EBITDA margin, leading to a FY27F EBITDA of US$1.1bn. This is based on projected margins of 11%-12% for Uber and DoorDash in 2024, which do not have the cross-selling benefits of GRAB
