Overview
Sea Ltd (NYSE:SE) is an internet platform company that consists of three main business segments – Garena (digital entertainment), Shopee (e-commerce), and SeaMoney (digital financial services).
Sea has suffered yet another relentless 20% drawdown since our last coverage (do read it before you proceed), making it one of the heaviest punished stocks of the year, down 78% from its ATH back in Oct 2021.
We reckon that most of the headwinds have been priced in by the market – the possibility of a recession happening, Shopee’s “poor” unit economics and profitability, and the downward spiral of Garena’s growth. At today’s valuation, the market has written off all of Sea’s accomplishments and it seems like the consensus is that Sea’s management is not capable of coming out of the woods.
Is there truly no way out for Sea to sail out of this, as what the market is implying?
We have taken some time to review and reflect on Sea’s most recent Q1’22 earnings call, both good and bad.
So, let's dive right into it.
Garena
A quick background is that Free Fire (“FF”) is a self-developed Battle Royale game, and it currently makes up most of Garena’s bookings.
Garena’s result was no surprise as FF’s bookings fell 28% sequentially from Q4’21 to Q1’22. This is a result of the quicker than expected return to normalization as more people are heading outside and spending lesser time on mobile gaming.
Its Quarterly Active Users (“QAU”) fell by 6% sequentially to 615.9 million users while the Quarterly Paying Users (“QPU”) fell by 26% to 61.4 million users. This led to a lower Paying User Ratio of 9.97% in Q1’22.
This means that not only are there fewer users playing games coming out of Covid but there are also fewer users spending money on the game. It is difficult to know the extent how which the easing of Covid restriction could further impact users’ playtime, and we may continue to experience further slowdown from FY23 and beyond.
Shopee
This is the crown jewel of Sea. As opposed to Garena, Shopee had a great quarter.
What we see is that its GMV has declined by 4.44% sequentially during the quarter.
At first glance, this may not seem good. However, readers need to recognize that a year ago, the e-commerce unit was riding on the Covid tailwind when they experienced heightened demand. This has accelerated the Gross Merchandise Value (“GMV”) growth from Q4’20 to Q1’21, especially so when Q4 is a seasonally better quarter as consumers tend to shop more towards the holiday season. Similarly, from Q4’21 to Q1’22, this sequential decline can be attributed to the reasons above, and together with the recent rising inflation, this might have led to lesser demand from consumers.
We should not be expecting this growth to continue in FY22 as e-commerce traffic normalizes with Covid restrictions gradually lifted.
In Singapore where we reside, the people we have spoken to have also reduced their spending on e-commerce platforms due to the rising inflation, or/and the fact that there aren’t many subsidies (i.e., vouchers) provided as before. This goes to show that Shopee has pulled back on its sales & marketing spending. However, some people continue to shop due to the convenience of online commerce.
When we take into account these factors, this wasn’t such a bad quarter for Shopee.
In addition, there are now 36,000 brand partners on Shopee Mall. They now account for 15% of its GMV from 12% a year ago, and Shopee also charges a higher take-rate to these partners.
Its current take rate stands at 8.72%, which came slightly lower than in Q4’21, although we did anticipate this to be higher. This is because as the reliance on Garena’s funding slowly diminishes and raising capital in the current market can be detrimental, it is critical that Shopee can be self-sustainable and that would require it to be profitable.
In the early days, Shopee has always maintained a low take-rate to acquire as many merchants and consumers to drive order volume. So even if the fee was to increase over time, merchants are likely to stay given the higher sales volume they are generating over other competitors’ platforms.
This makes Shopee a defensible business and allows it to extract pricing power.
This resulted in an overall lower Average Revenue Per User (“ARPU”) as it fell from $1.68 in Q4’21 to $1.30 in the quarter, indicating a 29% sequential decline.
We like to, however, highlight that this isn’t Garena’s inability to monetize the platform, rather, users do not want to cope at home and are demanding a different experience like socializing with friends. In fact, if we look at the top mobile games worldwide in April 2022 study by SensorTower, FF still stands at number 2. It’s a broad-based slowdown in mobile gaming and not only pertaining to FF.
Its adjusted EBITDA then fell by 29% sequentially, and its adjusted EBITDA margin (% of bookings) is currently at 38%.
While we certainly expect this result, it was still an overall disappointing performance from the gaming unit with profitability, users, and monetization all sank as it reflects the transition to the post-pandemic period.
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