Sea Limited (NYSE:SE) and Coupang (NYSE:CPNG) are two of the fastest growing e-commerce companies in Asia. Sea owns Shopee, the largest e-commerce platform in Southeast Asia and Taiwan, while Coupang owns the largest online marketplace in South Korea.
The market has been much kinder to Sea than Coupang. Sea went public at $15 per share in October 2017 and is now trading at nearly $300 a share. Coupang, which went public this March, is only hovering slightly above its IPO price of $35 a share. Let's see why Sea attracted more bullish investors than Coupang, and if it will remain ahead of its South Korean counterpart.
The key differences between Sea and Coupang
Sea and Coupang operate very different business models. Sea splits its two businesses into two main divisions: its e-commerce unit Shopee, which generated half its revenue last year, and its game publishing unit Garena, which generated 45% of its revenue.
Shopee is a listing platform for third-party sellers. It initially only connected individual merchants to buyers, but subsequently expanded its marketplace to connect bigger brands and businesses to individual buyers. It fulfills orders with its own regional logistics network and third-party logistics partners.
Garena previously licensed many of its games from Sea's top investor, Tencent. But in 2017, it launched its first self-published game, Free Fire, which caught fire across Southeast Asia and Latin America. Free Fire was the world's most downloaded mobile game of 2020, according to App Annie, and remains Garena's biggest profit engine.
Shopee also operates a digital payment platform, ShopeePay, and a mobile wallet called SeaMoney. Sea generated the remaining 5% of its revenue from these digital financial services last year.
Coupang mainly operates in South Korea, and its first-party marketplace runs on its own logistics network. Approximately 70% of all South Koreans live within seven miles of one of its logistics centers -- which makes it easy for its Rocket Delivery service to fulfill orders within a single day.
Coupang also provides food deliveries through Coupang Eats, grocery deliveries via Rocket Fresh, temp work opportunities through Coupang Flex, and streaming videos on Coupang Play. It offers Rocket Fresh and Coupang Play as exclusive perks for its Rocket WOW members, who gain even faster shipping options, free unlimited returns for 30 days, and access to special daily events for a flat monthly fee.
Which company is growing faster?
Sea's revenue surged 101% to $4.4 billion last year, as its e-commerce and digital entertainment (gaming) revenue surged 160% and 78%, respectively.
Sea remains unprofitable by GAAP measures, but it squeezed out a positive adjusted EBITDA of $107 million for the year -- compared to a loss of $179 million in 2019. It accomplished that profit growth by narrowing Shopee's losses per order and expanding Free Fire, which generates much higher profits than Shopee's marketplace.
Analysts expect Sea's revenue to rise 90% to $8.33 billion this year, even as Shopee faces tougher post-pandemic comparisons and Free Fire matures, and for its net loss to narrow slightly.
But investors shouldn't neglect Sea's two biggest risks. First, if Free Fire loses its luster, Sea's adjusted EBITDA will likely turn negative again. Therefore, Garena faces intense pressure to update Free Fire, monetize it more aggressively, and follow it up with another hit video game.
Second, Shopee needs to reduce its promotions and seller subsidies to narrow its losses -- but doing so could soften its defenses against its main rival, Alibaba's (NYSE:BABA) Lazada, in Southeast Asia.
Coupang's revenue rose 93% to $12.1 billion in 2020 as the pandemic caused more people to shop online, and its number of active customers rose 26% to 14.8 million. It isn't profitable by GAAP measures, but its adjusted EBITDA net loss narrowed from $550 million to $250 million.
Coupang doesn't expect to turn profitable anytime soon. Instead, it plans to continue expanding its logistics network, rolling out new services, and expanding overseas into Japan, Taiwan, and Singapore. That expansion could be challenging -- Amazon (NASDAQ:AMZN) and Rakuten (OTC:RKUNY) already lead Japan's e-commerce market, while Shopee is the clear leader in Taiwan and Singapore.
Analysts expect Coupang's revenue to rise 61% to $19.4 billion this year, with its growth decelerating as the pandemic ends, and it should remain deeply unprofitable.
The valuations and verdict
Sea trades at 18 times this year's sales. That's a high price-to-sales ratio, but it's arguably justified by the company's growth rates, and it remains cheaper than many other growth stocks. Coupang trades at just three times this year's sales, but that discount also reflects the market's uncertainty in its ability to cohesively expand its ecosystem, narrow its losses, and expand beyond South Korea.
I personally prefer Sea because it's growing faster, has a more diversified business, and offers investors a clearer path toward profitability. Balancing its entire business on a single hit game is admittedly risky, but it's a more sensible strategy than Coupang's scattershot plans to integrate more unprofitable businesses -- such as food deliveries and video streaming -- into its sprawling ecosystem.