Sea Plunges 22% After Unexpected Loss From Rising Competition

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(Bloomberg) — Sea Ltd. plummeted after reporting a surprise loss in the third quarter, hit by intensifying competition from Alibaba Group Holding Ltd. and ByteDance Ltd. on its home turf.

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The stock fell 22% in New York trading — wiping out about $6 billion in market value — after the company posted a net loss of $149 million, compared with a profit of $322 million the previous quarter. Analysts had estimated the e-commerce and gaming company would report a profit of about $100 million.

Chief Executive Officer Forrest Li told investors in a call after results he believes the company should invest heavily now to build scale in its online retail arm Shopee, amid competition from ByteDance’s TikTok, Alibaba’s Lazada and PDD Holdings Inc.’s Temu. Sacrificing short-term profit will help the business in the future, he said.

“The entrance of new players has intensified competition in our market,” Li said, without naming the entrants. “Investing in market share again now will position us better.”

Sea Plunges as Adjusted Ebitda Misses Estimates: Street Wrap

Sea did beat analysts’ projections for revenue growth. Sales rose 4.9% in the quarter to $3.3 billion, versus the average estimate of $3.2 billion.

Till recently, Sea’s strongest markets including Indonesia seemed under siege from TikTok and a new breed of video-oriented shopping services, which used popular influencers to sell a range of wares to an engaged, growing online population. But in September, Jakarta effectively forced TikTok to shut its shopping service, acting on a growing backlash from smaller merchants against the Chinese-owned platform.

Investors have been looking for clues since then on whether that abrupt exit will rekindle Sea. Before Indonesia, the market feared the Singaporean company — which reported more than a decade of losses after its 2009 founding — will sink back into the red. Compounding the situation are expectations that Southeast Asia’s internet economy will log its slowest growth on record this year, the result of an economic downturn with uncertain outcomes.

“Given competition remains intense and dynamic, we caution that if the aggressive spend pattern persists longer, it could further drag on profitability timing of Shopee,” Citigroup Inc. analysts including Alicia Yap wrote in a research note.

Sea’s other big business, the gaming division centered around Garena, has shrunk rapidly in 2023 given a lack of new blockbuster titles. But it recently said it would restore its marquee title Free Fire to Indian app stores after a surprise 2022 ban.

Read more: Sea, Grab Face Slowest Southeast Asia Online Growth in Years

What Bloomberg Intelligence Says

Sea’s investments in e-commerce unit Shopee, the reason it posted a loss after three profit-making quarters, may intensify and extend its net loss to 4Q. Marketing costs surged 12.4% year over year in 3Q, after declining for a fourth consecutive quarter in 2Q, vs. single-digit growth in gross merchandise value and revenue. Top-line growth should speed up in 4Q on incentive and marketing spending to entice shoppers and live-streamers, costs that could intensify as it regains lost market share and captures year-end shopping demand. This means the net loss might linger in the current quarter.

– Nathan Naidu, analyst

Click here for the research.

Li’s company had overhauled its business to focus on profitability earlier this year. 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 as recently as two years ago. The company froze salaries and slashed hundreds of millions of dollars in expenses to achieve positive cash flows.

To jumpstart growth, 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.

Beyond deep-pocketed competitors Alibaba and ByteDance, local rivals such as GoTo Group are also piling the pressure on Sea. GoTo, owner of Indonesian e-commerce contender Tokopedia, almost doubled its net revenue during the June quarter.

Read more: Sea’s Path to Profit Paved With Layoffs, Single-Ply Toilet Paper

–With assistance from Peter Elstrom.

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