Shares of Sea Limited (SE 3.25%) rose 17.7% in April, according to data provided by S&P Global Market Intelligence. This was in sharp contrast to the 4% decline for the S&P 500 -- a large monthly decline for an index. The company was able to buck the market's downward trend thanks to improving optimism among the analyst community in the middle of the month.
Investors have been preoccupied with competition for Sea's e-commerce platform, Shopee, from TikTok. In key markets including Indonesia, TikTok has merged e-commerce with its social video-sharing platform and it's been an effective combo. But it's been anything but stable -- things are constantly changing including TikTok recently raising its e-commerce commissions. And J.P. Morgan analyst Ranjan Sharma believes this benefits Sea's Shopee.
The changes to TikTok's commission structure aren't modest. According to The Information, TikTok Shop is going from 2% commissions to 8% commissions. That's a huge jump and could indeed help Sea's Shopee either by driving sellers to Shopee or by allowing Shopee to raise its prices along with the competition. And this is part of what drove the stock price higher.
Shopee is very important to Sea
For its part, Sea won't report financial results for the first quarter of 2024 until May 14. But last time it reported, there were some important things for investors to note with its Shopee business.
First, Sea has three businesses -- entertainment, e-commerce, and financial technology -- but e-commerce is the biggest. In the fourth quarter of 2023, a whopping 72% of the company's revenue was from its Shopee platform.
Second, Shopee is losing money for Sea. In 2023, the Shopee platform had adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of negative $214 million. For comparison, its other two business segments had positive earnings.
And finally, Sea's management is ramping up spending to grow Shopee. To put all three together, Shopee is big, losing money, and figures heavily into management's plans. Therefore, it's easy to see why investors would celebrate any potential benefit it would receive from TikTok raising its prices.
Can Shopee be better?
When it comes to Sea' expenses, sales and marketing has always been big. In 2023, it spent $2.8 billion on sales and marketing, much of it for Shopee. That's a lot of money but at least it paid off with 23.5% top-line growth for e-commerce in 2023.
Drilling down into expenses more is encouraging. According to management, it's been investing in an efficient logistics network. And in Q4, its cost per order went down 12% year over year thanks to these investments.
It's a glimmer of hope that Shopee can be a consistently profitable business for Sea in time. And if that happens, I believe it could drive strong performance for Sea stock over the long term.
