Deutsche Bank has upgraded Sea Ltd. to Buy from Hold, raising its target price for the stock from $165 to $170, saying the company’s current investment phase in logistics and fulfillment will pay off over time.

Analyst Peter Milliken wrote that Sea “had another strong quarter for revenue, which rose 38%,” but noted that “profit was unable to hold recent highs, due to growth investments.” 

He added that while the market reacted negatively to lower near-term profitability, “we think it normal for internet platforms to pass on efficiency gains, and invest more heavily during an up-wave of demand.”

The firm noted that Shopee’s gross merchandise value (GMV) expanded 28% to $32 billion, supported by a 12% increase in buying frequency among active users. 

“AI has lifted buyer engagement, improving purchase conversion by 10% YoY in 3Q,” Deutsche Bank stated, adding that Shopee’s collaboration with YouTube “has gained traction and will be extended to Brazil.”

Adjusted EBITDA climbed to $186 million, five times higher than a year earlier, though down 19% from the prior quarter. 

Deutsche Bank attributed the quarter-on-quarter margin decline, from 0.8% to 0.6%, to higher logistics spending. 

“The lower profitability reflected investments in logistics and fulfilment,” it said, noting that Sea has cut delivery times in Brazil by two days and is “building inventory in out-of-the-way areas to sharply reduce transport costs.”

The report also highlighted Sea’s digital finance arm, Monee, which grew revenue 61% year on year to $7.9 billion on 70% loan growth. 

“Part of the pain is likely due from more rapid deliveries,” Deutsche Bank said, but concluded that “building fulfilment requires up-front spend, but should be well rewarded over time.”