Sea Limited (SE -0.69%), a tech-focused conglomerate based in Singapore, reported its fourth-quarter and Fiscal 2021 full-year results on March 1. A plus for the company was that total revenue for the year 2021 reached $10 billion, up by 128%. On the other hand, Sea's net loss expanded by 26% to $2 billion as it continued its aggressive expansion plans.
Despite reporting strong growth, Sea's latest earnings report failed to impress investors, and the stock price dropped 13% on the day earnings were released. Digging further into the results reveals a few reasons that might have caused investors to cringe.
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Garena is facing enormous challenges
Sea's in-house gaming studio, Garena, has been a cash-generating machine for Sea thanks to its hugely profitable gaming franchise Free Fire. But there has also been concern that Sea is overly dependent on Garena and the latest earnings report points out why it's a serious issue.
Garena reported $1.1 billion in bookings (a close approximation of revenue as it relates to video game transactions) in the fourth quarter of 2021. While higher by 7% year over year, quarterly bookings came in lower than the $1.2 billion achieved in the second and third quarters of 2021. Similarly, quarterly active users (QAU) increased 7% year over year to 654 million but fell 10% from the 729 million total reported in the previous quarter. The weaker metrics indicate that Garena's growth might have hit a plateau, at least in the near term.
An added worry came when it was announced recently that the Indian government banned Free Fire in India. As India is one of the top markets for Garena in terms of QAU, the government's decision will impact Garena's performance in 2022 (as well as beyond) if Sea fails to resolve the issue soon. In other words, investors could see even lower QAU and revenue in the first quarter of 2022.
Shopee is scaling but still deeply in the red
It is no longer a secret that Garena's growth is slowing down. Investors, understandably, shifted their attention to Sea's ever-expanding e-commerce subsidiary Shopee. They hope that Shopee can carry on the baton to sustain Sea's growth machine.
Shopee has executed its expansion well. For the whole of 2021, revenue came in at $5.1 billion, up 136% year over year thanks to the 77% increase in gross merchandise value (GMV) of $63 billion, and a higher take rate on that GMV. Still, adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) for 2021 came in at a loss of $2.6 billion, twice that of $1.3 billion reported in 2020.
Shopee's losses continued to widen even as it scaled its business thanks to the heavy investment to solidify its leadership in Southeast Asia and penetrate newer regions like Latin America. The latter, in particular, has been a significant cash burner lately as the e-commerce company invests its way to market leadership. For perspective, Shopee Brazil is already the top app in the shopping category by downloads and total time spent on the app.
While there is no sign that this enormous cash burn will end anytime soon, Sea expects "Shopee to achieve positive adjusted EBITDA before HQ costs allocation in Southeast Asia and Taiwan" by the end of this year. This is particularly important since Garena -- with all its challenges lately -- has less free cash flow in 2022 to invest into Shopee and Sea's fintech subsidiary SeaMoney. If Shopee can deliver on this promise, it will relieve Sea from the ongoing funding pressure and provide Garena more time to resolve its problems.
Sea guides for much weaker growth in 2022
After delivering triple-digit percentage revenue growth rates in each of the last three years, Sea management said it expects to post "less than" 40% revenue growth for 2022.
The most unwelcome surprise here from analysts reporting on the stock is for Garena to deliver much lower bookings of $3.0 billion in 2022. It reported $4.6 billion in 2021. Shopee, on the other hand, is expected by analysts to grow revenue by 76% to $9 billion (the midpoint of the guidance).
Amid Garena's troubles, fintech operation SeaMoney is becoming an alternative growth avenue for Sea. Consequently, Sea will report its subsidiary's performance separately to give investors better visibility. In its first-ever guidance, SeaMoney aims to deliver between $1.1 billion and $1.3 billion in revenue for 2022. The midpoint of the guidance represents an increase of 155% from 2021.
While it is positive that SeaMoney is becoming a new growth engine for Sea, it is clear that 2022 will not be a smooth year for the group. Not only is Sea's revenue growth slowing down, but there is also a high chance that it will report even higher losses for the year amid lower income for Garena and continuous investments in Shopee and SeaMoney.
In short, investors should expect a bumpy ride in the coming months.
