It has been challenging to be an investor in Sea Ltd (SE +0.54%), the gaming and e-commerce conglomerate based out of Singapore. A year ago, everyone was celebrating the young company's never-ending success: record revenue, expansion of TAM thanks to its entry into Latin America and India, and others.
A year later, Sea's growth story has taken a significant turnaround. India banned the mobile gaming unit Garena while the Shopee e-commerce service exited India and a few European markets, to mention a few of the recent problems. A closer look at the company's first-quarter result for 2022 provides an updated version of its story in three parts: the good, the bad, and the ugly.
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Shopee continues to deliver on its promises
Let's begin with the good. Shopee, the up and rising e-commerce platform in Southeast Asia and Latin America, continued its strong execution (and growth) in 2022.
There are a few areas worth highlighting from Shopee's first-quarter performance. To start, Shopee delivered growth across essential metrics. Revenue surged 64% year over year to $1.5 billion on a 71% increase in gross orders and 39% higher gross merchandise value (GMV). The e-commerce company also improved its monetization, with marketplace revenue as a percentage of GMV rising to 7.2% compared to 5.7% last year.
Another aspect worth mentioning is that Shopee's adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) loss per order before headquarter (HQ) costs fell 70% from $0.12 to $0.04 in Southeast Asia and Taiwan. The lower loss per order puts Shopee on track to achieve a positive adjusted EBITDA before HQ costs in Southeast Asia and Taiwan.
Equally important, Brazil Shopee has become the next significant growth frontier for Sea. After only two years of operating in Brazil, Shopee ranked first in the shopping category by downloads and total time spent in-app. And while it was the second-ranked app by the average monthly active user (MAU) for the first quarter of 2022, it rose to the top position for MAU in March and April of 2022.
In short, Shopee expects to deliver another mind-boggling growth year in 2022. Based on the guided revenue of between $8.5 billion and $9.1 billion, the e-commerce growth will hit 72% at the midpoint of the guidance.
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Key Data Points
Garena's fall from grace
While Shopee continued to scale its business, Garena (Sea's gaming business) had a different fate. After growing its quarterly active users (QAU) from 272 million in the first quarter of 2019 to a high of 729 million in the third quarter of 2021, Garena lost more than 100 million in QAU to close with 616 millionusers in the first quarter of 2022. A combination of the ban in India and the reopening of global economies contributed to its woes.
Unsurprisingly, Garena's financial performance also took a hit during the quarter as bookings fell 26% year over year to $0.8 billion (or a decline of one-third from its peak bookings of $1.2 billion). A lower QAU and a declining paying user ratio (down from 12.3% to 10%) contributed to the quarter's falling bookings.
These numbers are worrying, but management has shared some positive insights into this business. As a start, Garena's flagship game Free Fire remained a top game globally. It was the most downloaded game globally in the first quarter and ranked third globally by average MAU for mobile games on Google Play. Besides, there were early signs of Free Fire's MAU stabilizing toward the end of the quarter. Beyond that, the company is investing in new features for Free Fire and also launching new games -- such as Moonlight Blade -- to position Garena for long-term growth.
Still, a turnaround is not guaranteed and will need more work and time. Moreover, Garena's declining profits caused a further hiccup in Sea's long-term growth plan (in the next section).
Keep an eye on cash burn
Sea has been executing a simple strategy in the last few years -- growing Garena's profitability while reinvesting those profits into Shopee and SeaMoney. Historically, this worked exceptionally well as Garena generates vast amounts of cash flow with little opportunity to redeploy, whereas the younger businesses need plenty of capital to scale.
But as Garena's profitability declines, the same strategy becomes less effective. For perspective, Sea delivered an EBITDA of negative $510 million in the first quarter of 2022 after accounting for Garena's EBITDA of $431 million. Last year, the group-wide adjusted EBITDA was a positive $88 million.
As cash flow from its gaming business fell, Sea had to dip into its cash hoard to fund the growth of Shopee and SeaMoney. Fortunately, it has a lot of cash on its balance sheet -- $8.8 billion in cash and cash equivalents and short-term investments. Using the burn rate of around half a billion dollars per quarter, the tech company has enough money for at least another four years.
Still, investors should keep an eye on the cash burn in the coming quarters. Any significant rise in cash burn will be a red flag to catch.
