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The Singapore-based company Sea Ltd. laid off 3% of its e-commerce unit Shopee’s employees, and also rescinded job offers in September 2022 to reduce costs. Shopee has withdrawn from markets in Europe and Latin America. Sea’s popular game Free Fire got banned in India due to the ongoing tensions between India and Chinese firms. The company is under increased pressure from investors to expand while keeping costs under control.
Sea Ltd. is a technology and communications company operating across three services: digital entertainment (Garena), e-commerce (Shopee) and financial services (SeaMoney) i.e. digital payments. Garena, the digital entertainment business was established in 2009 and has expanded its global footprint across 130 markets. Shopee, the leading e-commerce platform in Southeast Asia and Taiwan was established in 2015, while digital payments and financial services provider SeaMoney has been operational since 2014.
“With our growing scale, market leadership and strong cash balance, we believe we are well placed to increasingly leverage efficiencies across our ecosystem for growth and manage the levers of our business to reach profitability across more markets and segments in 2022 and beyond,” said Forrest Li, Sea’s Chairman and Group CEO during the FY2021 earnings call.
Sea Ltd’s Business Model
The company scaled its businesses rapidly during the Covid-19 lockdown, strengthening its user base and market leadership. Sea Ltd has been using the cash generated from its digital platform Garena to fund Shopee and SeaMoney. However, as per the annual reports of the company, the leadership believes that by 2025, cash generated by Shopee and SeaMoney will make these businesses self-fund their expansion and long-term growth.
For the second quarter that ended June 30, 2022, Sea Ltd reported a GAAP revenue increase of 29% YOY to $2.9 bn, mainly driven by the growth in its e-commerce and digital financial services businesses. The company’s total net loss was $931.2 mn for Q2 of 2022, nearly double the loss of $433.7 m posted in 2021.
Additionally, the company also reported a net non-operating loss of $33 m for Q2 of 2022, compared to a net non-operating loss of $25 mn the previous year. The non-operating loss in the second quarter of 2022 was primarily due to investment losses recognized amid lower valuations in the broader market. The company closed Q2 with $7.8 bn in cash, cash equivalents and short-term investments.
Sea Ltd. went public in 2017 and has been aggressively using cash for promotion strategies like free delivery and cashbacks. In 2020, Sea Ltd’s total revenue had doubled to $4.37 bn but the company also increased its expenditure on sales and marketing by 89% leading to a net loss of $1.61 bn. “The way [Sea] are making inroads is through heavy promotion using their cash pile. They don’t have a massively strong brand equity,” noted a tech industry insider to Nikkei Asia.
The problem is that the company’s Free Fire game is struggling to attract more users and this is weighing on its overall balance sheet. “Even though Sea Ltd managed to accumulate around $10.2bn in cash and cash equivalents from investors during 2020 and 2021, it burnt more than $2.0bn during the first six months of 2022 pursuing e-commerce and fintech growth aspirations. As the Gaming segment profitability declines, we expect cash burn to increase despite Sea’s efforts to cut losses in unprofitable businesses,” says equity analyst Oshadhi Kumarasiri of LightStream Research, who publishes on Smartkarma.
Sea Ltd stock movements
Forrest Li, the company’s Chinese founder who is now a citizen of Singapore, lost $800 m when Sea’s shares fell 14% on the New York Stock Exchange. Sea Ltd was once the most valuable corporation in Southeast Asia, when its shares peaked in October 2021, but has seen its share price drop roughly by 80% in the past year. The drop resulted from a broader tech industry slowdown, a shutdown of its business in India and pressure from investors to turn profitable. The Tencent-backed company has been trying to boost profitability by reducing costs in recent months.
The high losses have made some investors reduce their exposure to Sea Ltd. Tiger Global Management LLC, after six quarters of buying Sea, sold $473.8 m worth of Sea shares this year, according to SEC filings. In January 2022, Tencent Holdings, an early investor of Sea Ltd, sold over $3 bn worth of Sea’s stocks, cutting its stake from 21.3% to 18.7%. With the region-wide downsizing and extensive cost cutting, the shares of Sea Ltd. have been underperforming, while also facing macro headwinds of high inflation and a tech slump.
The company has a negative PE ratio and EBITDA, but market analysts have mixed opinions about the company’s future.
Outlook for Sea Ltd
One of the biggest winners of the pandemic, Sea Ltd’s digital entertainment and e-commerce businesses showed tremendous growth in terms of sales and market share. The Singapore-based company has successfully raised about $9 bn since late 2020 and has been laser-focused on turning profitable with long-term sustainability.
“Sea’s commitment to cost-cutting, shown in the leadership team forgoing their compensation, confirms our belief that it’s on track for Ebitda breakeven in 2023, one year earlier than consensus expects. Our scenario projects revenue to grow 30% in 2022 and pick up to 60% in 2023 with a gaming recovery and Brazil’s e-commerce growth. If Sea can improve its operating-expense-to-revenue ratio from 58% now toward Amazon and Mercado Libre’s 30-40% levels, it might turn a profit in 2023,” noted Nathan Naidu, an analyst with Bloomberg Intelligence.
The company is planning to diversify its portfolio across game genres, said CEO Forrest Li in a conference call. After shutting shop in some Latin American countries and Spain, Shopee is now focusing exclusively on core markets in Southeast Asia and Brazil. As rising interest rates and prices put pressure on the economy, consumers are cutting down on their online spending, and investors are growing less inclined to support expansion without profits. “The only way for us to free ourselves from relying on external capital is to become self-sufficient, generating enough cash for all our own needs and projects,” noted CEO Forrest Li.
