Shopee, which is part of the big tech company Sea Limited in Southeast Asia, might face more competition from the team-up of GoTo’s Tokopedia and TikTok in Indonesia, according to analysts.
Recently, GoTo and TikTok revealed a partnership in Indonesia to support small and medium-sized businesses, which make up over 90% of merchants in the country. GoTo is a combination of Indonesia’s ride-hailing giant Gojek and the e-commerce platform Tokopedia.
Analyst Kai Wang from Morningstar noted on Monday that this partnership could increase the challenges for Shopee, especially since Shopee is also having difficulty staying profitable.
Sea’s shares on the U.S. stock market ended 5.33% lower at $37.87 on Monday. In the third quarter, the company experienced a net loss of $143.9 million, a shift from the $331 million net income in the previous quarter. This change was due to Sea’s focus on growth rather than immediate profits to protect its market share.
Tokopedia and TikTok Shop Merger
As part of the agreement announced on Monday, Tokopedia and TikTok Shop Indonesia will merge into a larger Tokopedia entity. TikTok will have a controlling stake of 75.01%, and it plans to invest $1.5 billion in the entity over time. The joint statement from the two companies mentioned that the shopping features on the TikTok app in Indonesia will be handled by the expanded entity.
“I find the announcement quite interesting, but it’s also a concerning period for the e-commerce and consumer tech industry in Southeast Asia, especially for local companies in different countries,” stated Venugopal Garre, managing director at Bernstein.
According to Garre, Tokopedia or GoTo has essentially given up its direct presence in e-commerce by transferring it to TikTok in exchange for a minority stake. This move wasn’t well-received by the market. Garre mentioned, “The reality is that the market was expecting GoTo to monetize [Tokopedia].”
This development follows Indonesia’s ban on e-commerce activities on social media platforms in October, aimed at safeguarding local merchants. This ban led TikTok to suspend its e-commerce service, TikTok Shop. Moreover, Recently the Irish Data Protection Commission (DPC) fined TikTok €345 million (approximately $367 million) for children’s data.
TikTok Becomes Stronger
Jianggan Li from the Southeast Asian tech research firm Momentum Works described the GoTo-TikTok deal as a “masterstroke.”
In an analysis on Monday, Li stated, “TikTok Shop will gain full operational control, legitimacy in operating e-commerce, and some valuable local allies.”
“Shopee needs a very clear strategy to win this game, and the key to winning might not be in ecommerce.”
Jianggan Li
Li emphasized that when it comes to e-commerce products, operations, and resources, Shopee may not be able to directly compete with TikTok Shop. Winning in this competition, according to Li, requires Shopee to have a well-defined strategy, and the key to success might not solely lie in the realm of e-commerce.
Indonesia boasts 125 million TikTok users, making it the largest market in Southeast Asia and the second-largest globally, following the U.S., according to the company.
Wang from Morningstar highlighted Sea’s shift towards prioritizing growth over profits, responding to heightened competition from platforms like TikTok and Alibaba‘s Lazada in Southeast Asia.
Wang mentioned, “Because livestreaming e-commerce has seen faster growth on social media platforms like Kuaishou and TikTok compared to traditional e-commerce platforms recently, we anticipate that Sea may face higher operating expenses.” He added that this situation could result in “lower profit margins for Sea in the medium term.”
Investor Response to Goto
GoTo’s shares listed in Jakarta saw an increase of over 3%, reaching 89 Indonesian rupiah on Tuesday morning, following an approximately 20% decline on Monday.
Wang commented, “The 20% drop in GoTo shares after the announcement probably reflects market sentiment about the missed opportunity from selling its e-commerce business and the disappointment that GoTo will no longer be the majority shareholder.”
Garre from Bernstein expressed, “When this transaction happened, it was somewhat disappointing for investors. So, the significant reduction in the stock price we witnessed yesterday didn’t come as a big surprise.”
On Monday, Morningstar raised its price target for GoTo to 78 Indonesian rupiah, up from the previous target of 63 rupiah.
Explaining the adjustment, Wang stated, “The uptick in our valuation is due to the fact that GoTo will no longer experience substantial cash burn from Tokopedia, allowing it to achieve profitability by 2025 instead of 2027, as we have removed the operating and corporate expenses linked to the e-commerce unit.” He added that this change positions GoTo more favorably for achieving profitability.
Conclusion
Shopee faces tougher competition from GoTo’s partnership with Tokopedia and TikTok in Indonesia. Sea’s emphasis on growth affected its stock value. The Tokopedia-TikTok merger raised concerns and influenced market reactions. Investors had mixed feelings, impacting GoTo’s stock. Morningstar’s raised target for GoTo signals optimism for better profitability. The Southeast Asian e-commerce scene is changing, posing challenges and opportunities for major players.
