Offshore stocks jump as earnings rise, indicating resilience in e-commerce

(Bloomberg) — Shares of Sea Ltd. rose. After the company announced a smaller-than-expected decline in its quarterly profits and expected improved prospects for its e-commerce and gaming business.

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Southeast Asia's largest internet company reported adjusted earnings of $126.7 million before interest, taxes, depreciation and amortization for the fourth quarter through December. While this represents a 74% decline from the previous year – a result of marketing spending – it is still higher than analysts' forecast of $88 million. Sales also topped estimates.

The results ease some concerns about slowing growth of Shopee, the online retail arm, which is trying to fend off rivals such as ByteDance Ltd's TikTok. Alibaba Group Holding Ltd.'s Lazada, and even new entrants like PDD Holdings Inc. Timo. In December, TikTok rebooted the successful shopping app in Indonesia after signing an agreement with GoTo Group's e-commerce unit Tokopedia, creating a partnership that threatens Shopee's dominance.

Sea shares rose about 13% in pre-market trading in New York. After losing more than 80% over the past two years, the stock is up 26% so far in 2024.

Sales rose 4.8% to $3.6 billion, versus the average estimate of $3.5 billion, with e-commerce revenues up 23%. Although they are well below the growth rates of a few years ago, the results show that 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, rose about 29%, beating analysts' expectations of about 23%. The division's GMV will increase in the “high teens” this year, and earnings before interest, taxes, depreciation and amortization (Ebitda) are set to turn positive in the second half, the company said.

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“We have seen a more stable competitive landscape in recent quarters,” Tony Ho, chief financial officer, said on a conference call. “Even with intense competition over the past few quarters, we have been able to gain market share while improving our unique economics.”

Another major Sea company, gaming company Garena, is benefiting from continued demand for its hit game Free Fire. Last month, Free Fire hit more than 100 million peak daily active users, and Sea said the number of users and bookings for the game will grow by “double digits” this year. However, without a new 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 face stiff competition, Sea CEO Forrest Li said in August that he intends to increase investments in Shopee. It is ramping up its efforts to build a live-streaming arm, an offensive move that could erode margins and lead to a price war with TikTok and Alibaba. This is necessary to defend market share, he said.

Since then, investors have been searching for clues about whether there will still be a strong growth upside for Sea, which may have to sacrifice margins to stave off fees from wealthy rivals TikTok and Temu.

“We could see an inflection point in the coming months if Shopee succeeds in maintaining its leadership position through aggressive spending while delivering a monetization rate that gradually improves as EBITDA losses narrow,” Citigroup analyst Alicia Yap said before the results. .

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

What Bloomberg Intelligence Agency says:

Re-accelerating Sea's e-commerce investments in Southeast Asia appears necessary to defend its market share against the encroachments of Pinduoduo's TikTok Shop and Temu. This would return sales growth to its highest levels after deliberately slowing to break even, but would likely put pressure on profits, especially as digital banks ramp up.

-Nathan Naidu, Analyst

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(Updates with comment from CFO in seventh paragraph.)

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