3 reasons why the worst may be over for the Sea Limited customer

Sea limited liability company (S.E 0.55%) reached a new high in 2023, posting its first-ever profitable year. Investors were delighted, the company’s shares increased by 90% since the beginning of the year.

While there are several reasons for optimism about Sea’s prospects, investors have been particularly positive about Sea’s recent e-commerce development, Shopee.

Shopee returns to growth

The last few years have been a rollercoaster for Shopee. Launched only in 2015, Shopee was growing rapidly, but the COVID-19 pandemic gave it another significant boost. Revenue increased 160% in 2020 and increased 136% in 2021.

While investors were thrilled by Shopee’s seemingly limitless growth opportunities, it came at a huge cost as the parent invested all profits from Garena’s game development segment and beyond to maintain its hyper-growth momentum. Unfortunately, the good times didn’t last long. Garena faced two years of declining revenues and profitability while external cheap money dried up.

Almost overnight, Shopee’s strategy went from growth at all costs to self-sufficiency and profitability, reducing investments and reducing costs. As a result, revenue growth in Q3 2023 declined to a low of 16% due to a 5% increase in gross merchandise value (GMV). For Sea’s staunch supporters, this rate of growth was unacceptable as group-wide revenues grew by a disappointing 5% in the quarter.

Shopee returned to growth in the second half of 2023, which led to more solid results in the final quarter. For perspective, revenue grew 33% on the back of a 57% increase in orders and a 36% increase in GMV in the first quarter of 2024. While it was still early days, Shopee’s recent solid results had investors optimistic that e-commerce was not over yet. greatest growth.

Shopee kept losses at a manageable level

One of the biggest concerns for investors as Shopee shifts to growth mode is that Sea’s profitability will fall back into the red. For now, however, Shopee has shown that it wants to develop in a more sustainable way.

For example, Shopee’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were negative $22 million in the first quarter of 2024, while Asian markets posted a profit of $12 million offset by losses in other markets. Although adjusted EBITDA fell from a positive $208 million a year earlier to the red, the loss was immaterial compared to Sea’s total adjusted EBITDA of $401 million in the quarter.

Many factors have contributed to Shopee’s ability to balance growth and profitability. One is that Shopee has benefited from economies of scale by using its fixed cost structure to serve more customers (and orders). For example, in Brazil, Shopee reduced its margin loss per order by 87.9% year-over-year to negative $0.04 in the quarter.

Another reason is that the company has become more cost-sensitive due to the turbulent period in 2022-2023, during which it had to close businesses and reduce employee numbers. Such an experience would likely establish the right company culture to stay lean even after the growth mode restarts.

Shopee is well positioned for growth

With Shopee back in growth mode, there are good reasons to expect the recent momentum to continue for some time.

Externally, Shopee is well positioned to meet continued growth in e-commerce penetration in Southeast Asia and Brazil. In addition, these countries have favorable demographics that could sustain high GDP growth for many years, leading to higher retail spending over time.

Moreover, as Sea has returned to financial shape – it reported adjusted EBITDA of $401 million in the most recent quarter and has a solid balance sheet of $8.6 billion in cash, cash equivalents, short-term investments and other treasury investments – it has all the resources financial resources needed to maintain Shopee’s growth momentum.

What does this mean for investors

Shopee has had a turbulent two years as it repositions itself towards more sustainable, long-term growth.

While there are early green shoots emerging from the recent turnaround, investors should monitor Shopee’s execution in the coming months. Ideally, investors want Shopee to maintain its growth while maintaining strong financial performance.