Summary
Sea Limited has been one of the top sought-after pandemic plays. Both of its two engines – gaming and e-commerce – are key beneficiaries of the COVID-19 measures.
The uniqueness of SE, the ability to leverage its cash cow gaming unit to grow new businesses, has seen investors flocking to it. But these dynamics have changed.
The e-commerce unit’s EBITDA is getting more negative by the quarter amid a shrinking GMV per order trend.
The profit from Garena is already unable to cover the losses from the other units in the past quarters. If Garena falters, the ability to “subsidize” the e-commerce and fintech arms would diminish further.
Analysts are projecting a persistent revenue growth slowdown in the coming quarters and years.
vchal/iStock via Getty Images Investment thesis
Sea Limited (NYSE: SE ) has been one of the top sought-after pandemic plays. Both of its two engines – gaming and e-commerce – are key beneficiaries of the COVID-19 measures such as study/work-from-home. SE stock was already a solid performer pre-COVID, with gains surpassing that of its Chinese peer, Tencent Holdings ( OTCPK:TCEHY ) ( OTCPK:TCTZF ), and Latin American peer, MercadoLibre Inc. ( MELI ).
Over the past three years, Sea Ltd. has seen its share price soar more than 3000 percent. After recent declines, SE stock is still up over 17 times from late December 2018. In the same period MELI stock is up 2.8 times while TCEHY stock is up only 47 percent. Strictly speaking, Sea Limited doesn’t have an equivalent among the large internet companies. Its gaming business is highly profitable, enabling it to fund its heavily loss-making e-commerce and fintech units. MercadoLibre hosts the largest online commerce and payments ecosystem in Latin America and it doesn’t count gaming as a core business.
Tencent is big in gaming and fintech but its e-commerce ambitions are mostly manifested through its investments in related companies. Alibaba Group Holding ( BABA ) is huge in e-commerce and fintech but gaming is not a meaningful division on its own.
Sea Limited’s peers in Southeast Asia are also having different backgrounds. Grab Holdings Limited ( GRAB ) started as a ride-hailing platform and subsequently branched into fintech and on-demand delivery including groceries. Indonesia’s GoTo Group (GOTO) is formed from the merger of the two largest startups in the country – ride-hailing giant Gojek and e-commerce company Tokopedia.
Thus, the uniqueness of Sea Limited, particularly the ability to leverage its cash cow gaming unit to grow new businesses, has seen investors flocking to this tech firm halfway around the globe from the U.S. However, the growth at its gaming unit, Garena, which the company categorizes as Digital Entertainment, registered a dramatic slowdown in the third quarter of 2021.
Although the gross orders and GMV metrics are still showing healthy growth, the e-commerce unit’s EBITDA is getting more negative by the quarter. The total adjusted EBITDA for Sea Limited has flipped to negative this year. In other words, the profitable gaming business is no longer able to offset the escalating losses from the e-commerce and digital financial services divisions.
At the same time, share-based compensation continues to rise steadily. Competition in the region is also heating up, with GRAB coming to public view following its merger with a SPAC, and GoTo Group eager to show solid growth figures in the prelude to its IPO.
Hence, while I’m late to the warning party, with the SE stock down 42 percent from its recent peak, the steepest fall since it became publicly traded, I believe there could be further downside over the months ahead. Thus, the motivation of this article is to delve deeper into the seemingly incomplete picture provided by the results presentations to understand the health of Sea Limited’s e-commerce business. I will also highlight the ballooning losses as the divisions named E-Commerce and Digital Financial Services scale up. GMV growth tells only a partial (and possibly erroneous) story
Sea Limited’s e-commerce arm, Shopee, has successfully increased its gross orders from 0.6 billion in 2Q 2020 to 1.7 billion in 3Q 2021, nearly tripling during the interval. Shopee’s gross merchandise value (GMV) more than doubled from US$8.0 billion in 2Q 2020 to US$16.8 billion in 3Q 2021. Source: Sea Limited Q3 2021 Results Presentation
While the growth figures look all fantastic, we need to understand the gross order numbers have been increasing at a faster pace than the GMV. In other words, the value per transaction has been declining steadily. The GMV per gross order has fallen from $13.3 […]
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