Sea’s Shares Climb After Big Spending Helps It Fight TikTok
(Bloomberg) -- Sea Ltd. gained its most in more than a month after reporting an adjusted quarterly profit and a better-than-expected 2024 outlook, suggesting it’s making headway in fending off hard-charging rivals including TikTok and Alibaba’s Lazada.
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Its US shares leapt as much as 14% before closing about 5.6% up, its highest since August. E-commerce gross merchandise volume, or the value of goods sold, climbed a better-than-expected 29%. Sea now predicts GMV will increase in the “high teens” this year, helping it report a profit before interest, taxes, depreciation and amortization.
The results alleviate some concerns about the prospects for online retail arm Shopee, which is vying with ByteDance Ltd.’s TikTok, Alibaba Group Holding Ltd.’s Lazada and newer entrants like Temu in a slowing Southeast Asian arena. In December, TikTok restarted its hit shopping app in Indonesia after signing a pact with GoTo Group’s e-commerce unit Tokopedia, creating a partnership that threatens Shopee’s dominance.
“This indicates management’s confidence in maintaining market share while continuing to spend wisely,” said Alicia Yap, a Citigroup analyst. “Besides gradually scaling down the shipping subsidies, improving monetization rate through higher commission rate and growing ad dollars contribute to the swift turnaround of Ebitda.”
Sea Turns Lower After Rally Despite Strong Results: Street Wrap
Southeast Asia’s largest internet firm posted $126.7 million in adjusted earnings before interest, taxes, depreciation and amortization for the fourth quarter through December. While that’s a decline of 74% from a year earlier, as a result of marketing spending — it’s still higher than the $88 million analysts predicted. Sales rose 4.8%, also topping estimates.
Read More: Sea, Grab Face Slowest Southeast Asia Online Growth in Years
But marketing costs remain high, Nathan Naidu, an analyst at Bloomberg Intelligence, said. Aggressive promotions from TikTok Shop, Shein and PDD Holdings Inc. Temu prompted Sea to invest, particularly in live shopping, Naidu wrote in a note.
While significantly lower than growth rates a few years ago, the results show Shopee is still attracting buyers as online shopping gains popularity in the region of more than 650 million people.
“We have seen a more stable competitive landscape in the past quarters,” Chief Financial Officer Tony Hou said on a conference call. “Even with the most intensive competition during the past few quarters, we were able to gain market share while improving our unique economics.”
Sea’s other big business, the gaming arm Garena, is benefiting from sustained demand for its hit title Free Fire. Last month, Free Fire achieved more than 100 million peak daily active users, and Sea said the users and bookings of the game will grow “double-digits” this year. Still, without a new blockbuster hit, the gaming division’s fourth-quarter revenue fell 46.2% to $510.8 million.
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To cope with the intense competition, Sea Chief Executive Officer Forrest Li said in August he intends to ramp up investments into Shopee. He is stepping up efforts to build out its live-streaming arm, an offensive move that could erode margins and trigger a price war with TikTok and Alibaba. He argued that was necessary to defend its market share.
Since then, investors have been looking for clues on whether Sea might sacrifice margins to stave off deep-pocketed competitors TikTok and Temu.
In 2022, Sea embarked on an aggressive cost-cutting drive to reach profit, pivoting to a focus on the bottom-line as revenue growth decelerated from the triple-digit percentage rates it enjoyed in the preceding years. The company froze salaries and slashed hundreds of millions of dollars in expenses to achieve positive cash flows.
What Bloomberg Intelligence Says:
Sea’s re-acceleration of investments in Southeast Asian e-commerce seems necessary to defend its market share against encroachment from TikTok Shop and Pinduoduo’s Temu. This should kick sales growth back into high gear after a deliberate slowdown to achieve breakeven, but will likely pressure profit, particularly as digital banks ramp up.
-Nathan Naidu, analyst
Click here for research
--With assistance from Molly Schuetz.
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