Last year was a volatile one for Sea Limited (SE 0.05%). The Singapore-based tech conglomerate delivered two consecutive quarters of profitability in all three of its business segments. Yet its e-commerce business fell into the red in the third quarter of 2023 as Sea restarted investment in the business to fend off competition and rekindle growth.
While Sea Limited is set to report its first-ever profitable year in 2023, investors should not lose sight of some essential things the company aims to achieve in 2024.
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Aiming to sustain (if not grow) Shopee's market share
Shopee, a Sea company that launched in 2015, has been one of the most successful e-commerce stories in recent years. In particular, the young business took advantage of the tailwind created during the pandemic to grow rapidly in existing markets in Southeast Asia and enter new markets like Latin America. Its revenue jumped by 160% in 2020, followed by another 136% surge in 2021.
While Shopee's rapid expansion secured its place as Southeast Asia's largest e-commerce platform by market share (and as a leading player in Brazil), it cost its parent dearly. Sea had to reinvest the income of its profitable gaming business (and more from external funding) to subsidize new users for growth.
And when the gaming profits fell (and funding dried up), Sea had to turn its strategy completely from growth at all costs to survival at all costs. It slashed investment, cut down on expenses, shut down non-core businesses, and more.
Fortunately, the effort worked, and Shopee turned profitable in the fourth quarter of 2022 with positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $196 million. It continued to be profitable for the next two quarters.
The downside was that Shopee's gross merchandise value (GMV) growth slowed during that period. For perspective, Shopee's GMV grew just 5% year over year in the third quarter of 2023, which lagged the regional growth of 7% (estimated in a report by Google).
As competitors geared up to expand in Shopee's turf (primarily TikTok Shop and Lazada), it had to restart its investments in the business again to retain existing users and attract new ones.
In other words, 2024 will be a year of continuous investments by Shopee to sustain its market share in core regions, including Southeast Asia and Brazil. The magnitude of its investments is unlikely to reach those levels in the pandemic periods but will remain high and require cash from its profitable sister companies.
For perspective, Sea had to subsidize Shopee's EBITDA losses of $347 million with its profitable gaming and financial services businesses in the third quarter of 2023. Investors should keep an eye on crucial metrics like GMV growth, revenue growth, and groupwide net profit to gauge the effectiveness of Sea's strategy for delivering sustainable gains in 2024.
Aiming to sustain and grow its business in 2024
Like Shopee, Sea's gaming business (Garena) also expanded rapidly during the pandemic. Similarly, bookings more than doubled from $512 million in the fourth quarter of 2019 to $1.2 billion in the third quarter of 2021 as quarterly active users (QAUs) jumped from 355 million to a peak of 729 million.
But unlike Shopee, whose revenue continued to grow after the reopening of global economies, Garena went into a perpetual decline for the next few quarters. From the peak in the third quarter of 2021, bookings declined to a low of $443 million in the second quarter of 2023. Similarly, QAUs fell precipitously to a low of 486 million in the fourth quarter of 2022.
The silver lining is that Garena's business finally stabilized after almost two years of disappointing performance. QAUs have slowly improved to 544 million in the third quarter of 2023, and bookings have improved to $448 million from the low of $443 million.
And Garena remained profitable throughout that period of decline. For perspective, adjusted EBITDA was $234 million on the back of revenue of $592 million in the third quarter of 2023.
As Garena's metrics have stabilized, investors expect the company to get this segment back into growth mode in 2024. To this end, the potential reentry into India's market could give the company the push it badly needs to restart its growth momentum.
In short, investors should keep an eye on growth in QAUs and bookings for the rest of the year.
What it means for investors
Sea Limited is at a crossroads. Its e-commerce business grew rapidly during the pandemic at the expense of profits. Now, it aims to grow sustainably, so investors should focus on whether the company can deliver on that objective.
Garena, on the other hand, has halted its decline in 2023. So, in 2024, investors should focus on whether this business can rekindle growth, focusing on metrics like bookings, QAUs, and profitability.
In all, 2024 will be a crucial year for Sea Limited to show that it can execute on its promise of sustainable growth.
