Sea shares are rising after big spending helps the company

Sea shares are rising after big spending helps the company fight TikTok

(Bloomberg) – Sea Ltd. posted its highest gain in more than a month after the company reported adjusted quarterly profit and a better-than-expected outlook for 2024, suggesting the company is making progress in fending off stubborn rivals such as TikTok and Alibaba's Lazada.

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U.S. stocks rose as much as 14% before closing up about 5.6%, their highest since August. E-commerce gross merchandise volume, or the value of goods sold, rose a better-than-expected 29%. Sea now forecasts GMV will rise in the “high teens” this year, which will help it report earnings before interest, taxes, depreciation and amortization.

The results allay some concerns about the prospects for online retail arm Shopee, which competes with ByteDance Ltd.'s TikTok, Alibaba Group Holding Ltd.'s Lazada. and newer entrants like Temu in a slowing Southeast Asian market. In December, TikTok relaunched its hit shopping app in Indonesia after it signed a deal with GoTo Group's e-commerce division Tokopedia, creating a partnership that threatens Shopee's dominance.

“This shows management’s confidence in maintaining market share while spending wisely,” said Alicia Yap, an analyst at Citigroup. “In addition to the gradual reduction in shipping subsidies, improving monetization rates through higher commission rates and increasing advertising revenues are also contributing to the rapid turnaround in Ebitda.”

Despite strong results, the sea is sinking after the rally: Street Wrap

Southeast Asia's largest internet company posted adjusted earnings before interest, taxes, depreciation and amortization of $126.7 million in the fourth quarter ended December. While that's a 74% decline from last year due to marketing spending, it's still above the $88 million forecast by analysts. Sales rose 4.8%, also exceeding estimates.

The story goes on

Read more: Sea, Grab face slowest online growth in Southeast Asia in years

But marketing costs remain high, said Nathan Naidu, an analyst at Bloomberg Intelligence. Aggressive promotions from TikTok Shop, Shein and PDD Holdings Inc. Temu prompted Sea to invest in live shopping in particular, Naidu wrote in a note.

Although growth rates are significantly lower than a few years ago, the results show Shopee is still attracting shoppers as online shopping continues to grow in popularity among more than 650 million people.

“We have seen a more stable competitive landscape in recent quarters,” Chief Financial Officer Tony Hou said in a conference call. “Even with the most intense competition in recent quarters, we have been able to gain market share while improving our unique economics.”

Sea's other major company, gaming arm Garena, is benefiting from continued demand for its hit title Free Fire. Last month, Free Fire reached more than 100 million daily active users and Sea said the game's users and bookings will grow in “double digits” this year. Still, the gaming division's fourth-quarter revenue fell 46.2% to $510.8 million without a new blockbuster hit.

Read more: Sea's road to profit is paved by layoffs and single-ply toilet paper

To cope with intense competition, Sea Chief Executive Officer Forrest Li said in August he planned to increase investment in Shopee. He's ramping up efforts to expand his live-streaming division, an aggressive move that could squeeze margins and trigger a price war with TikTok and Alibaba. He argued that this was necessary to defend his market share.

Since then, investors have been looking for clues as to whether Sea might be sacrificing its margins to fend off deep-pocketed rivals TikTok and Temu.

In 2022, Sea launched an aggressive cost-cutting campaign to turn a profit, focusing on the bottom line as revenue growth slowed from previous years' triple-digit percentages. The company froze salaries and cut spending by hundreds of millions of dollars to achieve positive cash flows.

What Bloomberg Intelligence says:

Sea's renewed acceleration of investment in Southeast Asian e-commerce appears necessary to defend its market share against encroachments from TikTok Shop and Pinduoduos Temu. This should bring revenue growth back up to speed after a deliberate slowdown to reach break-even, but will likely put downward pressure on profits, particularly as digital banks ramp up.

-Nathan Naidu, Analyst

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– With support from Molly Schütz.

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