(Bloomberg) -- Sea Ltd. fell its most ever after reporting disappointing revenue and outlining plans to increase investment in e-commerce, a strategic shift that could erode margins and trigger a price war with TikTok and Alibaba.
The stock plunged 29% in New York after Sea reported that sales grew a lower-than-expected 5.2% in the second quarter, when it pulled back on shopping promotions and gaming revenue plunged 41%. Chief Executive Officer Forrest Li said the company intends to expand Sea’s online shopping arm, Shopee, and that “such investments will have impact on our bottom line and may result in losses.”
It’s a notable shift for Sea, which in previous quarters pledged to focus on profitability over the pursuit of growth. But competition from Alibaba Group Holding Ltd.’s Lazada, coupled with new entrants such as ByteDance Ltd.’s TikTok, is piling pressure on Shopee, once Southeast Asia’s online shopping leader. Alibaba grew its international commerce business 41% in the June quarter, while TikTok is expanding aggressively into key markets like Indonesia.
“There is a lack of visibility on the investment’s effectiveness,” Citigroup analyst Alicia Yap said in a note, downgrading the stock to neutral from buy. “A brutal battle could be just starting.”
Li’s comments about spending spooked investors long accustomed to watching price-based competition wipe out margins. Singapore-based Sea last year embarked on an aggressive cost-cutting drive to reverse years of losses, pivoting to a focus on the bottom-line as revenue growth decelerated from the triple-digit percentage rates of just two years ago. The company froze salaries and slashed hundreds of millions of dollars in sales and marketing expenses to achieve positive cash flows.
The company, the largest of Southeast Asia’s internet firms and briefly the world’s best-performing stock, is pulling back on a once aggressive global expansion to focus on its core operations to win back investors. Last year was one of the most difficult for Sea since its founding in 2009: it shed about $160 billion of market value from its October 2021 peak as the market turned against money-losing tech companies.
Read more: Sea’s Path to Profit Paved With Layoffs, Single-Ply Toilet Paper
Second-quarter sales were $3.1 billion, trailing the $3.2 billion analysts estimated on average. Revenue growth at Shopee decelerated to 21%, the slowest pace on record. Revenue from SeaMoney, the digital financial services business, rose 53%. Net income was $321.6 million, according to Bloomberg calculations based on first-half numbers, topping estimates.
The stiffer competition is weighing on the profitability of Sea and regional peers GoTo Group and Grab Holdings Ltd., which are also trying to cope with slowing economic growth, rising costs and a decline in technology company valuations. Grab and Indonesia’s GoTo Group continue to bleed losses.
Earlier Tuesday, GoTo cut its 2023 loss projection after staunching some of the bleeding in the latest quarter, taking the Indonesian company closer to its goal of getting into the black after an era of costly expansion. Grab is slated to report second-quarter results later this month.
What Bloomberg Intelligence Says
Sea should be able to sustain profits after a third consecutive quarter of net income in 2Q — despite missing consensus sales by 3% and e-commerce revenue by 6% — on continued cost discipline and e-commerce monetization, we believe. While sales trends could continue as a fall in promotional incentives and inflation-driven spending cool online shopping, users in gaming, Sea’s biggest profit driver, are rebounding.
- Nathan Naidu, analyst
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Longer term, Sea hasn’t entirely withdrawn from global markets and its Latin American operation could help drive growth, said Nathan Naidu, an analyst at Bloomberg Intelligence.
“Sea’s e-commerce expansion in Latin America could kick sales growth back into high gear after a deliberate slowdown to achieve breakeven,” he wrote in a note ahead of the results.
(Updates with comment from analyst in fourth paragraph)
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