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Shares of Sea Limited (SE -6%) are being hit by a wave of sellers today, heading back toward one-year lows following news that TikTok found a way to compete within the Indonesia e-commerce market. Multiple reports suggest that the China-owned social media giant will pour $840 mln to acquire most of GoTo Group, an Indonesian tech giant offering ride-sharing, delivery, and financial services. GoTo also owns an e-commerce platform, Tokopedia, in which TikTok would invest an additional $660 mln. From there, TikTok can restart TikTok Shop, its e-commerce business that already operates across several countries, including the United States.

In October, TikTok Shop was shut down by Indonesian regulators concerned over predatory pricing. The country banned e-commerce on social media platforms, prohibiting social media firms from facilitating product sales on their sites. The protectionist laws were also said to protect user data.

However, by forming a joint venture with GoTo, TikTok can now capitalize on the lucrative Indonesian e-commerce market. Tokopedia, which would now be a majority-owned company by TikTok, will acquire TikTok Shop. That way, TikTok users can purchase products from the app since TikTok Shop is now owned by a separate entity, not the social media platform, thus circumventing Indonesia's recently enacted protectionism laws. However, it is unclear how user data fits into this, given that it was cited as another reason behind the ban. The partnership will begin with a pilot period in close connection and supervision with regulators.

Why is this bad news for Sea Limited?

• SE's e-commerce arm, Shopee, is its most critical business, comprising two-thirds of its total revenue. SE has built up Shopee to become the largest e-commerce platform by monthly visitors by a substantial margin. Tokopedia and Alibaba-owned (BABA) Lazada have historically been the region's next two largest e-commerce competitors. However, their monthly visitors combined are still well below Shopee.
• Enter TikTok Shop, which launched in April 2021; SE immediately had an intense competitor on its hands. TikTok Shop overtook Lazada this past summer to become the third-largest e-commerce platform in Indonesia, underscoring how rapidly the social media e-commerce platform was expanding. Live stream shopping, the central component of TikTok Shop, has become so popular across Southeast Asia that it is one of SE's two main investment areas.
• SE's shift toward growth after a short stint focusing on profitability has been met by outsized investor selling pressure. Intensified competition was a factor behind management's decision to move back toward growth. SE noted that it must now invest in market share gains to better position it for sustainable profitability once economic conditions stabilize.

Sea Limited was struggling this year since it shifted its attention to growth above profitability. The news of Indonesia banning TikTok Shop in October did not provide much of a boost for SE, underpinning concern that TikTok would not give up its efforts to continue expanding its e-commerce business across the region. With today's reports cementing this concern, SE's headwinds have grown stronger.