GoTo Earnings: Margins Significantly Improving, but Long-Term Growth Trajectory in Question

We are maintaining our IDR 75 fair value estimate for GoTo GOTO after the company reported significant improvement in operating losses in its second quarter, offset by a 5% gross transactional value decline year on year, which highlights our main concern. E-commerce and on-demand service GTV declined 13% and 11%, respectively, bringing into question GoTo’s long-term revenue growth trajectory. The year-on-year declines worsened for both businesses from last quarter, and there is increasing uncertainty about where future GTV growth can come from, given increasing competition in the region, as indicated by GoTo management and peers. We believe that the stock is already overvalued as we reiterate our view that GoTo will be challenged to achieve profitability and reaccelerate GTV growth at the same time.

Revenue of IDR 3.55 trillion grew 85% year on year but was 10% less than our and consensus estimates. While we are encouraged that GoTo narrowed its operating margin loss by 35,400 basis points to a 58% loss year on year thanks to subsidy reductions and higher commissions, this also has led to lower demand for GoTo’s core businesses, which contributed to a declining GTV and revenue miss. The bigger concern is whether the GTV and revenue miss this quarter will become a holding pattern long-term because of the need to achieve profitability. We believe that that GoTo will continue to see near-term GTV declines as it prioritizes profitability as indicated by management, given that peer Sea is reverting to increasing subsidies to revive its stalling GTV growth as it saw its market share threatened once it stopped handing out promotions. GoTo also confirmed that there is greater competition on the e-commerce side, which will compound its existing stagnant growth. Given current concerns about Sea’s long-term profitability as it returns to heavy cash burn in its strategy, we believe it is likely that GoTo will experience the same headwinds.