(Bloomberg) — Sea Ltd. gave up most of its earlier gains as investors digested a broadly positive earnings report that showed aggressive spending on marketing.
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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 also topped estimates.
The US-traded shares initially gained as much as 19% in early trading before steadily giving up those gains as the market opened in New York. The shares were little changed at $51.16 at 11:02 a.m. The stock remains up about 45% off a January low.
Marketing costs stayed high in the quarter, 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 following the results.
Sea’s online retail arm Shopee is trying to fend off rivals such as ByteDance Ltd.’s TikTok and Alibaba Group Holding Ltd.’s Lazada, and newer entrants like Temu. 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.
Overall Sea’s fourth-quarter results beat Wall Street’s expectations. Sales rose 4.8% to $3.6 billion, versus the average estimate of $3.5 billion, with e-commerce revenue gaining 23%. 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.
E-commerce gross merchandise volume, or the value of goods sold, increased about 29%, topping the roughly 23% analysts predicted. The division’s GMV will increase in the “high teens” this year, and its Ebitda is set to turn positive in the second half, the company said.
“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.
“We are pleased to see positive trends in both growth and profitability for all three of our businesses,” the company said.
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 there will still be a strong upside for growth for Sea, who might have to sacrifice margins to stave off a charge from deep-pocketed competitors TikTok and Temu.
“We could see an inflection point in coming months if Shopee successfully maintains its leading position via diligent spending while delivering a gradually improving monetization rate with narrowing Ebitda loss,” Alicia Yap, an analyst at Citigroup, said ahead of the results.
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
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