Sea Limited$Sea Ltd(SE)$ is a Singapore-based technology conglomerate best known for its e-commerce platform Shopee, digital payment service SeaMoney and video game publisher Garena.
Sea's businesses were in a great position to prosper during recent years, and the pandemic also boosted enthusiasm for the stock (with a subsequent sell-off). Shopee saw a surge in online shopping as people practiced social distancing, while SeaMoney has benefited from the proliferation of contactless payments. Garena, meanwhile, has continued to grow its base of active users as people increasingly purchase smarphones and turn to mobile gaming for entertainment
However, the company is now looking into figuring out how to succeed after the pandemic boom and bust. It's not always easy for tech companies when they slow down in growth. We can see it in Sea's second quarter results and active user statistics. Morover, the company's popular Free Fire game has been banned in India, delivering a blow to the company's profits. In light of theses unfavorable changes, the comany is making some much-needed changes to its business model.
A finger in every pie
Sea is engaged in a variety of different businesses which include e-commerce, entertainment and financial services. It is well-known to customers in Asia and Latin America. This diversification provides valuable economies of scale for the company.
However, the company is facing certain headwinds, primarily the post-lockdown business decline and Free Fire being banned in India. To mitiage this, Sea is pivoting to new markets outside Southeast Asia and Latin America in the face of a struggling business.
The gaming division saw another decline in the second quarter. Its quarterly active user count was 0.6% higher compared to the previous quarter but 15% lower than a year ago. Additionally, its quarterly paying user count decreased to 56.1 million, 8.6% lower than the year-ago quarter. The gaming segment is reportedly shutting down some projects and slowing down its live stream platform to limit its cash burn rate. The company also announced job cuts as it tries to strengthen profitability.
The positive is that Sea's e-commerce segment, Shopee, and its finance segment, SeaMoney, are picking up the slack. The e-commerce quarterly active user count was up by 53% on a year-over-year basis after posting 42% growth last year. E-commerce gross merchandise value saw a 27% year-over-year increase to $19 billion.
Overall, Sea generated a total operating loss of $840 million in the second quarter alone, and investors were not impressed. But the company is looking to change course. Sea is closing up shop in Argentina and laying off most staff in Chile, Colombia and Mexico. Sea will also downsize the Garena unit. This is a decision that the company has been mulling for some time. Along with the game industry job cuts, multiple new games were canceled, along with a slew of layoffs on small teams in the past weeks. Investors reacted to this decision positively.
The company is not out of the woods yet, though. For the longest time, the e-commerce site Shopee was subsidized by the popularity of the game Free Fire. It has not helped that India banned the game. In addition, the high level of user growth for the Garena unit is already normalizing; we cannot expect active users to continue to grow forever. The combination of these factors is not great news for Sea.
Alibaba's entry adds additional pressure
Fast-growing e-commerce retailer Alibaba$Alibaba(BABA)$ $Alibaba(09988)$ is looking to enter new markets through its Southeast Asia-focused e-commerce arm, Lazada. Interestingly, it comes as Sea is exiting major markets. As Alibaba is facing difficulties at home, it is now prioritizing growth in overseas markets. One of its most successful efforts in recent times has been Lazada, followed by AliExpress - a platform that has come to serve millions of buyers abroad.
Sea is no longer focusing on expansion but rather adapting to the new way things are done. Earlier this year, it decided against aggressive investment in new markets and focused on Southeast Asia, Taiwan and Brazil instead.
Comments