What happened
Shares of Southeast Asian gaming, e-commerce, and fintech platform Sea Limited (SE -0.28%) were up big today, rising 7.2% as of 11:44 a.m. ET.
A broader rise in technology stocks fueled some of the gains, but international e-commerce stocks, particularly those in China and Southeast Asia, were rising by even more.
In company-specific news, Sea also announced it would be closing some nascent operations in frontier markets and making layoffs in its gaming unit. Shareholders have been worried about Sea's ongoing losses and cash burn, so some may have taken this as a good sign.
So what
While Sea Limited isn't a Chinese stock, it does often get grouped in with Chinese internet stocks, perhaps owing to Tencent Holdings' significant minority ownership. Meanwhile, Sea's home countries in Southeast Asia and Taiwan are close regional trading partners, so there are some linkages between these economies.
Chinese stocks were broadly higher Friday, after the country's recent August inflation report. Inflation rose just 2.5% in the month, lower than the expected 2.8% figure and the 2.7% July reading. Lower inflation fueled hopes that China may further stimulate its economy.
The Chinese economy has been reeling from its real estate bust, as well as rolling COVID-19 lockdowns. China did announce some more stimulus measures recently, but they were more measured than some analysts had hoped. But with the lower inflation rate, authorities may have room to stimulate the economy further without adverse consequences.
In company-specific news, Sea also announced layoffs and the closing of operations in some noncore markets. According to people close to Sea, the company will shutter its Shopee e-commerce operations in Argentina entirely, while also closing local operations in Chile, Colombia, and Mexico, while maintaining cross-border capabilities in those three countries. In addition, Sea will lay off hundreds of people in Shanghai within its Garena gaming unit. Sources told Reuters that Sea will lay off as many as several hundred people, or 15%, of the staff in Shanghai, and cancel some new game initiatives.
Why would this be taken as good news? Sea's business has hit some headwinds, and its only cash cow, the mobile game Free Fire, is now seeing lower monetization amid the economic reopening following pandemic-related lockdowns. Garena's revenue and profits declined last quarter, and Sea generated a total operating loss of $840 million last quarter alone.
However, management has pledged to bring its Shopee e-commerce platform and SeaMoney fintech platform to profitability in the near term, so these moves could be seen as following through on that promise.
Focusing on core operations wouldn't be so bad. Shopee has already achieved a strong leadership position across Southeast Asia, and also became the leading e-commerce platform in Brazil last quarter by monthly active users and total time spent on the app. Those markets have a lot of growth potential, so it's likely prudent to focus resources on strengthening those core operations in this environment.
Now what
This year is going to look very different for Sea, as several years of breakneck revenue growth and peak Free Fire profits are now giving way to a "reset" year.
Sea has pledged to break even on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in its Southeast Asian e-commerce operations (before headquarters costs) this year, and for SeaMoney to have positive cash flow in 2023. These cost cuts will certainly help toward that end; however, one has to wonder if there will be continuing revenue deceleration as well. Management withdrew guidance for the rest of the year on the last earnings call, saying that 2022 revenue growth would be an output, and not a company target.
Despite the tough environment, Sea's stock is now cheap enough to look very enticing for longer-term investors, at just a $36 billion market cap and 2.8 times sales; meanwhile, this cost rationalization should be very healthy for the company over the long term. On the other hand, investors should probably brace themselves for underwhelming growth numbers for the rest of 2022.
