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The good, the bad, the ugly of Sea: Shopee’s revenue doubles but cash cow Garena hits a wall

sea forrest li

Does anybody know what to make of Sea Ltd anymore?

Between growing revenues, particularly for its e-commerce arm, falling bookings for its moneymaker Garena, and a promising surge in digital financial services, it seems to me that nobody really knows which part of the business to focus on in judging the future of the company.

Media coverage of Sea’s Q1 results that was released on Tuesday, seems to confirm that.

Some lauded the smaller-than-expected losses, still strong gaming revenue or the nearly quadrupling financial business. Others pointed to a quarterly drop in e-commerce revenue, falling bookings for Garena (an early sign of dwindling revenues in the critically important arm keeping Sea afloat), or still very high losses of the entire company.

Stock market performance appears to have reflected these sentiments too.

After a strong jump of around 14 per cent on Tuesday, Sea’s price tumbled by 7.5 per cent the next day, erasing most of the gains as investors were happy to take the quick buck rather than hold onto their position.

Pandemic years have been extremely generous to Sea as nationwide lockdowns have forced people to buy more online and spend more time on digital entertainment in the absence of better things to do outside as F&B establishments were closed, shopping was off-limits, and closed borders froze international travel.

As a result, both of Sea’s key business verticals — e-commerce and gaming — have enjoyed a surge in interest, elevating the entire company to over US$170 billion in value and making, albeit briefly, its founder, Forrest Li, the richest man in Singapore.

However, the COVID bonanza is now over, the market capitalisation is down 80 per cent, as is Li’s net worth, and the financial results for the first quarter of 2022 reflect the challenges ahead.

But it’s not all bad, so let’s take a closer look in a classic 1966 spaghetti Western style.

The Good

Shopee keeps growing. Its GMV has increased by around 40 per cent and revenue has nearly doubled year on year.

At this rate, Sea expects to hit between US$8.5 billion to US$9.1 billion in 2022, from US$5.1 billion in 2021.

sea gross orders vs gmv
Shopee is still going strong, despite a small quarterly dip which is expected after busy Q4 / Image Credit: Sea

Despite setbacks in India and France, the company is still keeping its pace, attracting about as much business as it did in the typically busiest Q4, filled with big events like the Singles’ Day, Black Friday, Cyber Monday and, of course, the festive Christmas month of December.

sea digital financial services
Digital Financial Services are rapidly becoming a billion dollar business / Image Credit: Sea

Elsewhere, its infant digital financial services branch of Sea Money has very nearly quadrupled its revenue, reaching US$236 million in Q1, firmly on its way to become another billion-dollar business (and more).

And since e-commerce is what draws most people to Sea Money, the continued growth of Shopee will help it at the same time.

Overall, the company is on track to grow its revenues to somewhere around US$15 billion, from US$10 billion last year.

The Bad

What made some analysts and investors happy about the recent results was that the losses were not as bad as they were thinking, but that’s still hardly a reason to celebrate if the company burns a couple of billion per year.

And it looks like it may happen again, since Sea lost another US$580 million this quarter.

sea digital entertainment bookings
Digital Entertainment bookings / Image Credit: Sea

What is far worse, however, is that Garena, its leading moneymaker that’s fuelling the expansion of Shopee and Sea Money, appears to have hit a wall.

As the pandemic restrictions receded around the world, fewer people are spending time and money on digital entertainment. There were signs of the momentum slowing down last year, but the first quarter of 2022 shows that the lower pace has now become an abrupt halt.

While Garena still posted a respectable US$1.1 billion in revenue (up from US$800 million last year), its bookings have taken a dive in the opposite direction (from US$1.1 billion down to US$800 million).

Since bookings are effectively the future commitment of paying customers, this negative turn will see the company’s results dive in subsequent quarters, which will see a much more painful drop year-on-year, considering that peak revenue for 2021 was around US$1.2 billion.

Unsurprisingly, the number of both active and paying customers also took a dip. And while YoY changes may look positively minuscule, we have to remember that the gap between all-time highs recorded in the third quarter of 2021 is much larger.

sea active vs paying users garena

Image Credit: Sea

Compared to the penultimate quarter of last year, the number of active users dropped by a staggering 113 million (over 15 per cent), with nearly 32 million of them being the paying ones — a collapse of 34 per cent.

In fact, the number of quarterly paying users is the lowest since the second quarter of 2020, and it doesn’t look like the company has a solution that could drastically change this trend.

free fire ban in india
Free Fire was among the 54 apps with ties to China banned in India this February / Image Credit: Technical Guruji via Youtube

What’s worse, Free Fire, its most popular game — and the most successful mobile franchise in the world right now — was banned in India, one of Garena’s largest markets, earlier this year (in a nationwide campaign banning certain apps with real or perceived ties to China), and it doesn’t seem like there’s a reversal coming anytime soon.

As a result, Garena’s EBITDA (earnings before interest, tax, depreciation and amortization) collapsed from around US$600 million to US$700 million it was recording last year, to just US$430 million, while the same metric for Shopee went up by about the same, sending the company down from a net positive of US$88 million last year to minus US$509 million in 2022.

By all financial measures, the company is bleeding money, while its only profitable business has received several blows.

The Ugly

This is where things get very unpredictable. The company still has US$8.8 billion in cash in its coffers, but it has burned through around US$3 billion in the last two quarters.

At this rate, it may be forced to raise more capital much sooner that it would ideally like to.

sea cash
Between Q3 2021 and Q1 2022, the company’s most liquid holdings shrank by US$3 billion / Image Credit: Sea

It was very lucky to have closed another round of financing through the stock market last year, when its capitalisation was near all-time highs, but repeating the same move now would prove a lot more costly after it lost 80 per cent in value.

sea ltd stock performance
Sea Ltd. stock performance since peak. Its current market capitalisation is around US$40 billion / Image Credit: Google

This isn’t specifically Sea’s problem or the fault of some underperformance by the company, as many others have suffered the same fate, with the entire stock market reeling from anti-inflationary measures enacted by central banks worldwide.

But it also means that it’s difficult to predict when the situation may return to status quo ante, if ever.

After all, last year’s record-setting valuations have largely been a byproduct of enormous pandemic stimulus packages, with billions, if not trillions, of dollars finding their way to stocks, elevating them beyond all reason.

This sort of situation may not repeat for years to come, particularly if high inflation persists.

total assets of us federal reserve
Image Credit: Visual Capitalist

In other words, on one hand, Sea is an enormously successful company that runs a profitable digital entertainment business, has cracked international e-commerce with hit app Shopee, and has a very promising digital finance arm that is benefiting from the latter’s global expansion.

On the other hand, however, for all its achievements, it has to navigate very stormy waters and rapidly changing conditions, which are no longer as favourable as they have been for the past two years.

While it has considerable supplies stashed away to aid its survival, it is consuming them at a much faster rate than is sustainable over as little as two or three years.

What could happen then? Raise more funding? Issue stock? Take on more debt? Acquisition by a bigger company? Who knows, it’s anybody’s guess today.

Featured Image Credit: Sea

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(UEN 201431998C.)

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