Mr Tan, whose equity research covers Grab and Sea, said rising interest rates will be a bigger factor for the share prices of these two Singapore-based tech firms moving forward.
“Catching the bottom for these two stocks will be difficult, but Sea looks to already be trading below what is justifiable vis-a-vis peers, while Grab is still at a premium,” he told CNA.
He explained that this is because Sea’s valuation remains “well supported” by its profitable gaming arm Garena. The company also has a “much lower bankruptcy risk” due to the same reason.
Sea posted a US$580.1 million net loss for the first quarter ended March, wider than the US$422.1 million loss a year ago.
The company also turned cautious on Shopee due to “elevated macro uncertainties” and revised its e-commerce revenue forecast to be between US$8.5 billion and US$9.1 billion for FY2022, down from the previous range of US$8.9 billion to US$9.1 billion.
Mr Tan said the company could disappoint in its second-quarter earnings report due before the US market opens on Aug 16, as the results will have to reflect the costs of unwinding its business in Spain and the challenge of elevated freight rates. There is also the possibility that Garena might “disappoint as people game less” due to the scaling back of work-from-home arrangements.
But both e-commerce and gaming are “well-proven and very sticky business models” in the long run, added the Maybank Securities equity analyst, who has a “buy” call and a target price of US$105.
Sea’s shares was last seen trading at US$87.42 on Monday.
For Grab, Mr Tan said the tech company’s shares may see “a short-term uplift” on the back of positive sentiment for its ride-hailing business as economies reopen and adjust to life with COVID-19.
But in the long run, Grab’s ability to achieve profitability “remains an identifiable risk”.
“GMV (gross merchandise value) must double by 2025 to achieve group profitability and free cash flow positive target of 2025, (without) factoring in the digital banks which will have heavy capital requirements,” he said.
Grab’s digital bank joint venture with Singtel – known as GXS Bank – has secured licences in Singapore, Malaysia and Indonesia, with the launch in Singapore likely happening in the coming months.
As part of the authorities’ guidelines, the digital bank in Singapore must have S$1.5 billion in minimum paid-up capital. Grab will have to fork out S$900 million based on its share in the joint venture, said Mr Tan.
“This is not inclusive of the Malaysian and Indonesian digital banks, which both have their own capital requirements to meet,” he added. “We will monitor closely how they manage the capital requirements of the digital bank.”
Meanwhile, the digital bank venture could take seven years to turn a profit, according to Mr Tan who cited the example of UK’s digital-only bank Atom. Overall, the analyst has a “sell” call on Grab at a target price of US$2.29.
CGS-CIMB analysts offered a different view on Grab, noting that higher ride-hailing fares and easing competition across different markets in recent months could accelerate the firm’s path to profitability.
For instance, it noted that ride-hailing fares in Singapore were up between 22 and 42 per cent in the second quarter of FY2022, while promotions “reduced meaningfully”. Lower discounts were also observed in the food delivery segment in different markets.
“We believe Grab is at an inflection point with strong margin improvement potential starting (in the) second quarter of FY2022,” the analysts wrote in a report dated Jul 29.
They added that they expect gross merchandise value and segment profitability of the mobility business to “surprise on the upside” thereby helping Grab to narrow quarterly losses.
For the first quarter ended Mar 31, Grab announced losses of US$435 million, down 35 per cent from the US$666 million loss a year prior.
Revenue grew 6 per cent to US$228 million from US$216 million on the back of growth in its food and grocery business segment, as well as a rebound in the mobility segment. Grab is set to report second-quarter results on Aug 25.