Shares of Sea Limited (NYSE:SE) recently tumbled after the Southeast Asian gaming and e-commerce platform posted mixed second-quarter numbers. Its total revenues rose 137% annually to $436.2 million, but its net loss widened from $250.8 million to $280.1 million.
Excluding stock-based compensation and changes to the fair value of its convertible notes, its net loss still widened from $198.7 million to $215.1 million. Most of those losses can be attributed to Sea's e-commerce platform, Shopee, and its payment platform AirPay.
Shopee competes directly against Alibaba's (NYSE:BABA) Lazada across Southeast Asia, while AirPay competes against Alibaba-backed Alipay. This is a David-vs.-Goliath situation, but it's doubtful that Sea can land a fatal shot between Alibaba's eyes.
Why Sea's e-commerce arm is in serious trouble
When Sea went public in late 2017, it claimed that Shopee was the top e-commerce platform in Southeast Asia. However, Lazada disputed that claim and noted that Shopee's market-share figures included Taiwan, which is usually counted as part of the Greater China area rather than Southeast Asia. iPrice reports that in Southeast Asia, Lazada commanded the largest market share in 2018 at 27%. It was followed by Tokopedia at 17%, Shopee at 15%, and Bukalapak at 12%.
Sea's "e-commerce and other services" revenues rose 207% annually to $165.7 million during the quarter, or 38% of its top line. It mainly attributed that growth to the expansion of its e-commerce marketplace and the "positive development" of new revenue streams like transaction-based fees, value-added services, and advertising.
However, the e-commerce unit's cost of revenues also surged 118% to $198.4 million, mainly due to bank fees, higher expenses from running its value-added services, and rising staff compensation costs. Sales and marketing expenses also rose 19% to $163.7 million as the e-commerce unit launched fresh marketing campaigns.
As a result, Sea's e-commerce unit posted a whopping operating loss of $269.6 million, compared to a loss of $195 million a year earlier. The unit's adjusted EBITDA loss also widened from $188.3 million to $248.3 million.
David doesn't stand a chance against Goliath
Meanwhile, Lazada's parent company, Alibaba, runs a highly profitable e-commerce business. Last quarter, Alibaba's core commerce revenues rose 44% annually to RMB 99.5 billion ($14.1 billion) as its operating profit surged 52% to RMB 35 billion ($5 billion).
Alibaba generated most of its e-commerce revenues from China, but it also noted that Lazada more than doubled its order growth annually for the third straight quarter as its mobile daily active users doubled. Alibaba attributed that growth to "effective user acquisition programs" and investments in "strengthening [Lazada's] third-party marketplace business, management team and technology infrastructure."
Alibaba didn't disclose any financial details for Lazada, but it's likely operating the platform at thin margins or a loss like Shopee. The key difference is that Alibaba can subsidize Lazada's growth with the profits from its Chinese marketplaces. Once Lazada pushes rivals like Shopee out of the market, it can cut marketing costs, streamline its operations, and further expand its scale to improve its profitability.
Sea is trying to support Shopee's growth with its core gaming business, but that unit generated an adjusted EBITDA of just $263.8 million during the quarter -- which was nearly erased by the e-commerce unit's adjusted EBITDA loss of $248.3 million.
Simply put, Sea would be much more profitable if it divested its e-commerce business or sold it to Alibaba. However, Sea's top investor, Tencent (OTC:TCEHY), which is using the company to contain Alibaba's growth in Southeast Asia, might prevent that from happening.
Sea faces choppy seas ahead
Sea remains firmly committed to expanding its e-commerce business to challenge Alibaba and Lazada. I love a good underdog story, but Sea's obsession with Lazada could sink its business and overwhelm its more promising gaming division.
Editor's note: This article has been updated to include the correct data from iPrice.