Why SEA could have seen the bottom
Why SEA could have seen the bottom
The stock is up a lot and could have more upside. Here's why.
Hi friends!
In early March, SEA (SE) announced its Q4 2023 earnings and the stock price had one of the strangest reaction I have recently seen. First the stock shot up almost 15%, then was down almost 4% and it ended the day up 6.3%.
On a red day, Sea's stock was up 3.43% the next day and it’s up 29% since the earnings. Noticeable for a stock that has been punished for so long. What did the market see? Let's analyze these earnings.
The Numbers
Revenue was up 5% year-over-year, both for the quarter and the full year.
5% looks very low, of course, for a growth company. The reason there is very clear: Garena still weighs on the results. Compared to last year, revenue was down 46%, from $948.9 million to $510.8 million.
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This is what he means for Sea:
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If you look at Shopee, you see revenue growth of 23.23% year-over-year.
For SeaMoney, there was growth of 24.25% year-over-year, from $380.2 million to $472.4 million.
So, I think it's fair to say the decline of Garena masks the strong results of Shopee and SeaMoney.
If we look at the expenses, there are some interesting things to note there.
The first is Sales & Marketing. Those expenses are up 104% year-over-year, indicating what management had said, that they would invest heavily there to gain market share. Read: we want to fend off TikTok and ensure we take market share from all other competitors to keep our market-leading position.
Now, 104% looks extreme, right? But you shouldn't forget that in Q4 2022, the company cut these expenses by 55%. That means that even with this 104% surge, the S&M expenses are not back to where they were before. You can also see that in the SG&A (selling, general and administrative) expenses.
As you see, SG&A is at the 2022 level again after the company focused on efficiency for three quarters in 2023.
For R&D, more or less the same applies, although costs are not up that much, just 19%. This is still down substantially compared to pre-spend-cutting.
Of course, spending so much more on S&M will also affect profitability. And yes, compared to Q4 2022, adjusted EBITDA was down 74.5%. It's important to note that it was still positive, though.
If you look at the full year 2023 and compare it to 2022, you see how impressively Sea has turned around—from a loss of $700 million EBITDA to a positive $785 million. That remains one of the most impressive turnarounds in such a short time I have ever seen, and I still think Sea doesn't get enough credit for that
It's also important for investors to see that Sea has improved its financial situation considerably. This is the total amount of cash, equivalents, short-term and long-term investments (bonds).
Of course, we also have to look at the other side: debt. As you can see, the company has been reducing its debt.
So, while a few quarters back, Sea’s financial situation didn’t look great as it was bleeding almost a billion per quarter, the financial situation now looks much stronger.
Looking Under The Hood
Let's look a bit more under the hood, starting with Garena.
Garena
As you can see, bookings are slightly up quarter-over-quarter for the second quarter in a row. That's important because they are a good indicator for the future. While Quarterly Active Users are slightly down from Q2 and Q3, the percentage of paying users remained stable. And that word, 'stable,' is what investors had been looking for for Garena. A part of the enthusiasm after the earnings release will probably have been because of that. The bottom seems to be in.
Forrest Li on Garena's initiatives to foster users:
For instance, we have continuously introduced fresh and highly localized content to Free Fire. In the fourth quarter, we collaborated with Lamborghini to allow players to drive their cars in-game. We also recently announced our collaboration with JKT48, an idol group from Jakarta, as our Indonesian brand ambassador. These partnerships excite and delight our players, and enable us to nurture our local communities.
And that resulted in great guidance:
I am happy to share that we are seeing improved user acquisition and retention trends for Free Fire. In 2023, Free Fire was the most downloaded mobile game globally according to Sensor Tower. We are pleased that these positive trends are continuing into 2024. In February, Free Fire achieved more than 100 million peak daily active users. It remains one of the largest mobile games in the world.
With this positive momentum, we currently expect Free Fire to grow double-digits year-on-year for both user base and bookings in 2024.
That's exactly what we have been waiting for! This is the Garena turnaround. Free Fire is Garena's self-developed game and that means the margins are quite a bit better.
In the meantime, Garena remains a cash machine, generating adjusted EBITDA of $217 million in the fourth quarter and $921 million for the full year 2023.
While the ban on Free Fire in India was removed in September 2023 already, the game has not been relaunched yet. This is what Minju Song, the company's Chief Corporate Office said about the launch in India:
We are still making changes to the Free Fire in here to best accommodate our users' preference locally. And we'll update the market when there's more material development.
The company also said that it's working hard in the background on diversifying its content. Minju Song, Sea's Chief Corporate Officer:
We're very focused on building future pipeline in terms of expanding our portfolio of genres and type of content, including more user-generated content, deploy more AI tools in building, in following new models of interaction with our users.
Shopee
As we saw, Shopee's revenue was up 23% compared to the same quarter last year.
The company's heavy investment in S&M influenced EBITDA, which went from positive $196.1 million to negative $225.3 million.
The heavy investment in sales and marketing paid off. Founder and CEO Forrest Li on the earnings call:
Shopee’s investments since July last year have paid off. I am pleased to report that, despite an environment of intensified competition in Southeast Asia, we believe we had a meaningful gain in market share between the start and the end of 2023.
We are happy to have solidified Shopee’s market share in the region, and we intend to maintain our market share in 2024.
We can actually see that in the numbers as well, in the combination of these two numbers with revenue growth.
Remember, revenue was up 23%. GMV stands for gross merchandise value, or the total value of everything sold on the platform. The gap between GMV growth of 29% and revenue growth is the bigger spending on S&M, probably with free shipping and other promotions.
If you look at gross orders, you see a big discrepancy with GMV growth, as gross orders are up 46%. That indicates Shopee could attract many new customers. It's generally known that new customers first order lower-priced items and only when they are familiar with the platform, they order higher-priced items. That means this S&M spending will probably be a great investment that will pay itself back multiple times over in the next years.
S&M spending was not the only reason for the negative EBITDA. The company continued its investments in its logistics network. Forrest Li on the conference call.
On logistics, we opened five new sorting centers and 385 new first and last mile hubs across our Asia markets and extended our logistics network further to improve our coverage. Through more automation, tighter planning, better routing and other operational improvements, our platform logistics cost per order in Asia decreased by 12% year-on-year in the fourth quarter. This was partly driven by our own logistics network cost per order decreasing by 20% from the same period last year.
On logistics, we have been working to provide a more efficient and reliable experience to our users. This includes reducing wait time, minimizing delivery losses, and providing a more seamless impact experience to both sellers and buyers in managing logistics.
I hear some analysts claiming that Sea has not invested in its delivery network but now they suddenly do. I don't understand those claims. I don't think these people have followed the conference calls or must have been asleep. This is from 2022, for example:
During 2022, we have been able to drive meaningful improvements in logistics costs to our ecosystem. This will remain an important area of focus going forward.
We believe that lowering the cost to serve will be key to our long-term growth by unlocking large underserved user segments across our markets.
(...)
On logistics, we have been working to provide a more efficient and reliable experience to our users. This includes reducing wait time, minimizing delivery losses, and providing a more seamless impact experience to both sellers and buyers in managing logistics.
So, claiming Sea has not invested in its logistics network in the past is uninformed.
The company expects breakeven for Shopee in the second half of the year, while at the same time, it wants to maintain the current market share now that it's up from last year.
A big driver was live streaming:
We have rapidly ramped up live streaming e-commerce, which accounted for around 15% of our physical order volume in Southeast Asia last December. With the scale and leadership achieved, unit economics of the segment also improved meaningfully quarter-on-quarter.
Livestreaming now already accounts for 15% of the overall sales, which is quite impressive.
96% of Shopee users are aware of live streaming, beating TikTok with 87%, Lazada with 71% and Tokopedia with 62%.
Awareness is one thing, but use is much more important and there, Shopee's lead is even much bigger. 88% of Shopee users have used live streaming in the past 3 months, versus 61% for TikTok, 35% for Lazada and 27% for Tokopedia. Shopee beats TikTok in its own game, and convincingly.
As for Shopee in Brazil, it keeps performing very well. Sea placed this in some Brazilian magazines.
This is the translation:
Over 3 million Brazilian sellers registered
More than 90% of sales in the country are from Brazilian sellers
More than 400 major brands in the Official Stores section
More than 10,000 employees in Brazil
And this is in the text:
One in four Brazilians access the app monthly and the brand's profiles on social media have exceeded 15 million followers, more than one million people play on the app daily and there are more than 3 million registered Brazilian sellers.
If you didn't know, Sea, a company with gaming experience, uses it for engagement on Shopee.
There are:
more than 10 thousand employees, 10 distribution centers, more than 100 logistics hubs and another 2 thousand collection points throughout the country focused on products from local retailers.
Just like Shopee overall, the Brazilian division got a big boost from live broadcasts where merchants can sell products.
In total, Shopee Live have already received more than 400 million views and more than 6 billion likes since launch, just over a year ago.
Big brands like L'Oreal, Playstation, and Nintendo already had their own live broadcasts on Shopee livestreaming in Brazil.
For Shopee overall, advertising was a big driver of growth. Sea's CFO Tony Hou on the earnings call:
Within GAAP marketplace revenue, core marketplace revenue, mainly consisting of transaction-based fees and advertising revenues was $1.6 billion, up 41% year-on-year as a result of platform growth and improved monetization.
As for 2024, the company set guidance for Shopee, with high-teens growth. The company expects to get this through staying the cheapest in all of its markets, combined with its content ecosystem, read livestreaming. that, expect
SeaMoney
SeaMoney's revenue was up 24% year-over-year.
SeaMoney showed a big profit, with adjusted EBITDA of $550 million in 2023. In the fourth quarter, adjusted EBITDA was up by 96% to $148 million.
Great to see that SeaMoney is not just growing steadily but growing very profitably.
There are more than 16 million users now and the consumer and SME loans increased by 27% year-over-year to $3.1 billion.
The company said digital banking and insurance should be a growth driver:
In addition to our credit business, SeaMoney is also growing our digital banking and insurance services to capture future business opportunities in the digital financial services segment.
Also important, NPLs or non-performing loans. These are defined as 90 days late and more. NPLs remained at 1.6%, which is actually low.
SeaMoney will continue to invest in user acquisition and credit business expansion with prudent risk management, as there are good margins in this business. Forrest Li on the conference call:
And given the very healthy margin in the businesses (...) we will invest more to acquire new users to the platform and this essentially will bring us a better profitability in the long term. We measure our use acquisition costs very prudently. Every user requires to bring positive profit over time.
My Take
I know that the price action often suggests different, but each time, I am positively surprised by how good Sea's results are. This time again. It's a big relief to hear that the company guides for double-digit growth for Free Fire. To me, that is a gamechanger. Combined with the "high teens" growth for Shopee and "continued robust growth" for SeaMoney, I think we could finally see the growth we want to see from Sea. I don't want to jinx it, but the bottom could be in the rearview mirror. Finally.
The company guided for another profitable year in 2024 on top of the good growth predictions for the several branches. At the same time, Sea keeps investing where it should. It defends its dominant marketplace position for Shopee against TikTok and it does so very successfully until now.
As you probably all know, Sea is quite a big position in the PM Future Fund and I know many Multis also have a sizeable position. After carefully analyzing the earnings, I still feel very comfortable with the position and I could see myself adding a bit when I add to the PM Future Fund later this week. To me, the long-term prospects for Sea are totally intact.
In the meantime, keep growing!
If you look at Shopee, you see revenue growth of 23.23% year-over-year.
For SeaMoney, there was growth of 24.25% year-over-year, from $380.2 million to $472.4 million.
So, I think it's fair to say the decline of Garena masks the strong results of Shopee and SeaMoney.
If we look at the expenses, there are some interesting things to note there.
The first is Sales & Marketing. Those expenses are up 104% year-over-year, indicating what management had said, that they would invest heavily there to gain market share. Read: we want to fend off TikTok and ensure we take market share from all other competitors for a stronger position.
Now, 104% looks extreme, right? But you shouldn't forget that in Q4 2022, the company cut these expenses by 55%. That means that even with this 104% surge, the S&M expenses are not back to where they were before.
The second thing that stands out to me is the continued decrease in General and Administrative expenses, down another 34% on top of the 24% reduction in Q4 2022. That's impressive.
If you take SG&A together, this is what you see.
This shows how much Sea cut in expenses. In my opinion, it's a good choice not to stay on that ultra-low-calorie diet for too long.
For R&D, more or less the same applies, although costs are not up that much, just 19%. This is still down substantially compared to pre-spend-cutting.
Of course, spending so much more on S&M will also affect profitability. And yes, compared to Q4 2022, adjusted EBITDA was down 74.5%. It's important to note that it was still positive, though.
If you look at the full year 2023 and compare it to 2022, you see how impressively Sea has turned around—from a loss of $878 million EBITDA to a positive $1.18 billion. That remains one of the most impressive turnarounds in such a short time I have ever seen, and I still think Sea doesn't get enough credit for that.
It's also important for investors to see that Sea has improved its financial situation considerably. This is the total amount of cash, equivalents, short-term and long-term investments (bonds).
Of course, we also have to look at the other side: debt. As you can see, the company has been reducing its debt.
So, while a few quarters back, it looked precarious for Sea, which was bleeding almost a billion per quarter, the financial situation now looks much stronger.
Looking Under The Hood
Let's look a bit more under the hood, starting with Garena.
Garena
As you can see, bookings are slightly up quarter-over-quarter for the second quarter in a row. That's important because they are a good indicator for the future. While Quarterly Active Users are slightly down from Q2 and Q3, the percentage of paying users remained stable. And that word, 'stable,' is what investors had been looking for for Garena. A part of the enthusiasm after the earnings release will probably have been because of that. The bottom seems to be in.
Forrest Li on Garena's initiatives to foster users:
For instance, we have continuously introduced fresh and highly localized content to Free Fire. In the fourth quarter, we collaborated with Lamborghini to allow players to drive their cars in-game. We also recently announced our collaboration with JKT48, an idol group from Jakarta, as our Indonesian brand ambassador. These partnerships excite and delight our players, and enable us to nurture our local communities.
And that resulted in great guidance:
I am happy to share that we are seeing improved user acquisition and retention trends for Free Fire. In 2023, Free Fire was the most downloaded mobile game globally according to Sensor Tower. We are pleased that these positive trends are continuing into 2024. In February, Free Fire achieved more than 100 million peak daily active users. It remains one of the largest mobile games in the world.
With this positive momentum, we currently expect Free Fire to grow double-digits year-on-year for both user base and bookings in 2024.
That's exactly what we have been waiting for! This is the Garena turnaround. Free Fire is Garena's self-developed game and that means the margins are quite a bit better.
In the meantime, Garena remains a cash machine, generating adjusted EBITDA of $217 million in the fourth quarter and $921 million for the full year 2023.
While the ban on Free Fire in India was removed in September 2023 already, the game has not been relaunched yet. This is what Minju Song, the company's Chief Corporate Office said about the launch in India:
We are still making changes to the Free Fire in here to best accommodate our users' preference locally. And we'll update the market when there's more material development.
The company also said that it's working hard in the background on diversifying its content. Minju Song, Sea's Chief Corporate Officer:
We're very focused on building future pipeline in terms of expanding our portfolio of genres and type of content, including more user-generated content, deploy more AI tools in building, in following new models of interaction with our users.
Shopee
As we saw, Shopee's revenue was up 23% compared to the same quarter last year.
As the company invested heavily in S&M, this had an influence on EBITDA, which went from positive $196.1 million to negative $225.3 million.
The heavy investment in sales and marketing paid off. Founder and CEO Forrest Li on the earnings call:
Shopee’s investments since July last year have paid off. I am pleased to report that, despite an environment of intensified competition in Southeast Asia, we believe we had a meaningful gain in market share between the start and the end of 2023.
We are happy to have solidified Shopee’s market share in the region, and we intend to maintain our market share in 2024.
We can actually see that in the numbers as well, in the combination of these two numbers with revenue growth.
Remember, revenue was up 23%. GMV stands for gross merchandise value, or the total value of everything sold on the platform. The gap between GMV growth of 29% and revenue growth is the bigger spending on S&M, probably with free shipping and other promotions.
If you look at gross orders, you see a big discrepancy with GMV growth, as gross orders are up 46%. That indicates Shopee could attract many new customers. It's generally known that new customers first order lower-priced items and only when they are familiar with the platform, they order higher-priced items. That means this S&M spending will probably be a great investment that will pay itself back multiple times over in the next years.
S&M spending was not the only reason for the negative EBITDA. The company continued its investments in its logistics network. Forrest Li on the conference call.
On logistics, we opened five new sorting centers and 385 new first and last mile hubs across our Asia markets and extended our logistics network further to improve our coverage. Through more automation, tighter planning, better routing and other operational improvements, our platform logistics cost per order in Asia decreased by 12% year-on-year in the fourth quarter. This was partly driven by our own logistics network cost per order decreasing by 20% from the same period last year.
On logistics, we have been working to provide a more efficient and reliable experience to our users. This includes reducing wait time, minimizing delivery losses, and providing a more seamless impact experience to both sellers and buyers in managing logistics.
I hear some analysts claiming that Sea has not invested in its delivery network but now they suddenly do. I don't understand those claims. I don't think these people have followed the conference calls or must have been asleep. This is from 2022, for example:
During 2022, we have been able to drive meaningful improvements in logistics costs to our ecosystem. This will remain an important area of focus going forward.
We believe that lowering the cost to serve will be key to our long-term growth by unlocking large underserved user segments across our markets.
(...)
On logistics, we have been working to provide a more efficient and reliable experience to our users. This includes reducing wait time, minimizing delivery losses, and providing a more seamless impact experience to both sellers and buyers in managing logistics.
So, claiming Sea has not invested in its logistics network in the past is uninformed.
The company expects breakeven for Shopee in the second half of the year, while at the same time, it wants maintain the current market share now that it's up from last year.
A big driver was live streaming:
We have rapidly ramped up live streaming e-commerce, which accounted for around 15% of our physical order volume in Southeast Asia last December. With the scale and leadership achieved, unit economics of the segment also improved meaningfully quarter-on-quarter.
Livestreaming now already accounts for 15% of the overall sales, which is quite impressive.
In the Overview Of The Week, I already shared this statistics. 96% of Shopee users are aware of live streaming, beating TikTok with 87%, Lazada with 71% and Tokopedia with 62%.
Awareness is one thing, but use is much more important and there, Shopee's lead is even much bigger. 88% of Shopee users have used live streaming in the past 3 months, versus 61% for TikTok, 35% for Lazada and 27% for Tokopedia. Shopee beats TikTok in its own game, and convincingly.
As for Shopee in Brazil, it keeps performing very well. Sea placed this in some Brazilian magazines.
This is the translation:
Over 3 million Brazilian sellers registered
More than 90% of sales in the country are from Brazilian sellers
More than 400 major brands in the Official Stores section
More than 10,000 employees in Brazil
And this is in the text:
One in four Brazilians access the app monthly and the brand's profiles on social media have exceeded 15 million followers, more than one million people play on the app daily and there are more than 3 million registered Brazilian sellers.
If you wouldn't know, as a company with gaming experience, Sea uses it for engagement on Shopee.
There are:
more than 10 thousand employees, 10 distribution centers, more than 100 logistics hubs and another 2 thousand collection points throughout the country focused on products from local retailers.
Just like Shopee overall, the Brazilian division got a big boost from live broadcasts where merchants can sell products.
In total, Shopee Live have already received more than 400 million views and more than 6 billion likes since launch, just over a year ago.
Big brands like L'Oreal, Playstation, and Nintendo already had their own live broadcasts on Shopee livestreaming in Brazil.
For Shopee overall, advertising was a big driver of growth. Sea's CFO Tony Hou on the earnings call:
Within GAAP marketplace revenue, core marketplace revenue, mainly consisting of transaction-based fees and advertising revenues was $1.6 billion, up 41% year-on-year as a result of platform growth and improved monetization.
As for 2024, the company set guidance for Shopee, with high-teens growth. The company expects to get this through staying the cheapest in all of its markets, combined with its content ecosystem, read livestreaming. that, expect
SeaMoney
SeaMoney's revenue was up 24% year-over-year.
SeaMoney showed a big profit, with adjusted EBITDA of $550 million in 2023. In the fourth quarter, adjusted EBITDA was up by 96% to $148 million.
Great to see that SeaMoney is not just growing steadily but growing very profitably.
There are more than 16 million users now and the consumer and SME loans increased by 27% year-over-year to $3.1 billion.
The company said digital banken and insurance should be a growth driver:
In addition to our credit business, SeaMoney is also growing our digital banking and insurance services to capture future business opportunities in the digital financial services segment.
Also important, NPLs or non-performing loans. These are defined as 90 days late and more. NPLs remained at 1.6%, which is actually low.
SeaMoney will continue to invest in user acquisition and credit business expansion with prudent risk management, as there are good margins in this business. Forrest Li on the conference call:
And given the very healthy margin in the businesses (...) we will invest more to acquire new users to the platform and this essentially will bring us a better profitability in the long term. We measure our use acquisition costs very prudently. Every user requires to bring positive profit over time.
My Take
I know that the price action often suggests different, but each time, I am positively surprised by how good Sea's results are. This time again. It's a big relief to hear that the company guides for double-digit growth for Free Fire. To me, that is a gamechanger. Combined with the "high teens" growth for Shopee and "continued robust growth" for SeaMoney, I think we could finally see the growth we want to see from Sea. I don't want to jinx it, but the bottom could be in the rearview mirror. Finally.
The company guided for another profitable year in 2024 on top of the good growth predictions for the several branches. At the same time, Sea keeps investing where it should. It defends its dominant marketplace position for Shopee against TikTok and it does so very successfully until now.
As you probably all know, Sea is quite a big position in the PM Future Fund and I know many Multis also have a sizeable position. After carefully analyzing the earnings, I still feel very comfortable with the position and I could see myself adding a bit when I add to the PM Future Fund later this week. To me, the long-term prospects for Sea are totally intact.
In the meantime, keep growing!
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