As promised, here are the investment risks I foresee with Sea. Please note, these are risks I have internalised and am comfortable to accept. I hold Sea shares happily, so I hope potential investors can also assess the same before making a decision for themselves.
1. Garena degrowth - this to me is the biggest risk as Free Fire is generating ~$1B of annual adjusted EBITDA which Shopee is able to reinvest to grow & fend off competition. Despite Free Fire having stabilised and some signs of improvement with a potential India relaunch ..
(which is pending per online sources), I am not a big fan of the game having played it personally and the low monetization numbers at 7.5% of users are a sign of weakness (although partially an opportunity too).
We have spoken about Garena releasing a new game which can eclipse Free Fire but quite frankly (and rationally) this becomes hard if Shopee needs almost all the free cash generated by Free Fire as more money cannot be freely pumped to experiment with newer titles.
Building a successful title from scratch is a very hard endeavour. We know Garena has already tried games built in partnership with studios but none of those have even remotely come close to match Free Fire's success.
The risk remains not in Garena not growing anymore (that would be an okay outcome and which is factored into the stock price imo) but in declining further. If the drops like last year happen again, Shopee might be seriously restricted to invest into growing & fighting competition.
2. Shopee S&M spend, rising competition - I see this as a medium risk, I believe Shopee has already built a very strong economic moat for itself and its penetration will not be easy to replicate as it already has a $80B annualized GMV which is miles ahead of any competitor.
The challenge or risk however is, if management continues to aim for a pursuit of market share their cash reserves might start getting depleted fast and with the currrent share price, they will not be in a position to shore up equity without a significant dilution.
The way I look at this is - if Chinese apps want to enter eCommerce in SEA or LATAM, they have to now fight not just Shopee or Lazada, but also the numerous others who have grown to a few billion $'s in GMV/market cap and have strong capital bases .. such as Tokopedia, Blibli, Bukalapak in SEA and Meli in LATAM. There will be quarters where they can burn through cash and take away a few market share points / slow down Shopee's growth, but that game cannot go on forever as the amount they can burn will be unsustainable
3. Collaborations between smaller players and Chinese apps (e.g. TikTok Shop or Temu w/ Blibli or Tokopedia or Bukalapak etc.) - this I believe is a bigger risk than
I think some of the Chinese apps will realise it sooner than later that perhaps the more prudent and sustainable approach would be to try partnering up with one of the existing players and grow with them rather than building everything from the ground up.
The reasons are: launching an eCommerce operation requires a lot of local market knowledge and logistics capabilities which would be easier to setup without attracting the negative attention of regulators via local partnerships.
However, what would happen as a result is the smaller ones next to them might perish and seek a buyout from Shopee/Lazada to survive. I expect a lot of consolidation/M&A if this continues, which again might require Sea to put in some cash or do stock swaps / dilution.
4. Executional / strategic - As we know, Sea leadership has made many directional changes & amendments to their strategy such as exiting markets, alternating between growth to profitability to trying to strike a balance again.
In my opinion, they have executed brilliantly thus far responding as would be expected in each market scenario. But we cannot discount the fact that with so many changing dynamics all around them with the tanking share price and mounting pressure to deliver from employees there could be times where they might feel pressured or doubt their own decisions and direction which lead them to change or adopt short term decisions which might not be right for the company. This is a potential executional risk, slightly lower risk but it's a definite risk.
5. Institutional pressure, leadership rejigs - Bigger than executional risk, given Sea has massive hedge fund ownerships, there could be pressure that activist investors and fund managers might apply to form cartels to influence leadership rejigs.
Sea has forever been run by the same group of people who is the founder along with some of his trusted lieutenants. Any external pressure like this could significantly risk the company's execution plan against the backdrop of the challenges it is working to solve.
6. Seamoney loan quality worsening - Perhaps the lowest risk of them all based on current delinquencies but if Seamoney reports drastically worsened loan losses, there could be a negative drag on the income generated from the credit business (which again is directly funding Shopee with adjusted EBITDA of +$165M in Q3'23). The absolute impact might be manageable based on their current cash reserves given their loanbook is still relatively small at $2.4B, but this risk cannot be fully ignored by long term investors
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