Sea Limited (SE 2.03%) has fallen from grace lately as it faces challenges from the post-pandemic effects and the weak global economies.
Sea's management team responded by pivoting from growth to self-sufficiency and profitability to deal with these challenges. While there are some early green shoots -- with net loss narrowing 39% quarter over quarter in the latest earnings result -- it is still too early to declare victory.
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Shopee reduced its losses but delivered materially lower growth
When the pandemic hit in 2020, Shopee was at the right place at the right time to benefit from the surge in e-commerce demand. That year, revenue jumped by 160%, followed by another 136% jump in 2021.
But as the economies reopened, consumers returned to their old ways of shopping in brick-and-mortar stores. Understandably, e-commerce companies like Shopee faced a headwind in 2022. The latest numbers tell it all.
In the third quarter of 2022, Shopee's revenue grew just 32%, down from 51% in the second quarter of 2022 and 134% in the same period last year. Gross merchandise value (GMV) performed even worse, up by only 14% year over year. More than half of the increase in revenue came from charging sellers a higher fee rather than selling more products.
While the reopening put enormous stress on Shopee's growth, its strategy pivot toward profitability also contributed to the slower growth. Here, the company cut costs aggressively by reducing subsidies and headcount while increasing sellers' fees. These actions, understandably, put a dent in growth. But the upside was that adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) improved from a loss of $684 million to a loss of $496 million.
As Shopee continues to work toward adjusted EBITDA breakeven by the end of 2023, investors will likely see slower growth (or even no growth) in the coming quarters. But if the strategy works, Shopee will be in a better financial position after this crisis.
Garena continued its downward spiral
Once a strategic asset within Sea that helped fund the investment in Shopee, Garena faced the uphill task of turning around its business.
Customer bookings fell 46% year over year and 7% quarter on quarter on the back of lower quarterly active users. Bookings declined every quarter over the last four quarters. Garena's poor performance was a significant reason Sea had to slow down its expansion in Shopee.
Worse, management revised its full-year bookings to be between $2.6 billion and $2.8 billion, down from the previous guidance between $2.9 billion and $3.1 billion. The global uncertainties and the reopening trends put a massive strain on Garena's near-term performance.
On a slightly positive note, the gaming company remained highly profitable, generating an adjusted EBITDA of $290 million in the third quarter of 2022. Still, investors were unimpressed by the more than 50% reduction in EBITDA (it was $715 million in the same period last year).
What should investors focus on in the coming months?
One of the biggest worries investors have about Sea is whether it can reduce its high cash burn rate. While it's still too early to declare victory, the company's cost-cutting measures have materially reduced cash consumption over the last few quarters.
For example, Sea consumed $1.6 billion in cash in the fourth quarter of 2021, but cash burn fell in the next three quarters to $500 million in the third quarter of 2022. The lower cash burn significantly improved Sea's chance of survival as it still had $7.3 billion in cash, cash equivalents, and short-term investments on its balance sheet. Still, investors should keep an eye on Sea's cash burn in the coming quarters.
Besides, investors should monitor the impact of Shopee's decision to focus on profitability. In particular, we want to closely watch Shopee's market share in its core markets -- Southeast Asia and Brazil. Any sign of market share deterioration will be a red flag.
