3 reasons why Sea is in choppy waters

TL;DR

• Sea’ share price fell 13% on the day of release of its 4Q21 results, bringing its share price decline from the peak to above 65%.
• Disappointingly, the number of paying users in its gaming business fell from the previous quarter.
• In its guidance, management expects total bookings in its gaming business to fall sharply in 2022, driven by slowdown in online activity with re-opening, as well as ban of Garena Free Fire in India.
• In the e-commerce business, losses continue to widen for Shopee as the company invests for growth

What happened?

Sea Limited, the parent of e-commerce platform Shopee, saw a sharp decline in its share price of 13% on the day of release of its 4Q21 results. This brings its share price to US$126.50, close to 65% lower than its recent peak.

What is causing the sharp fall in its share price? We share some of the reasons why Sea is in choppy waters.

#1 – Gaming paying users declined sharply

Sea has only one business unit that is profitable – its gaming business. This is why the performance of the unit is so closely watched. The publisher of the highly popular online game Free Fire saw a sharp fall of 17% in the number of paying users in its digital entertainment business, compared to the previous quarter.

In explaining the reason for the decline, the company said that there has been a weakening due to the overall opening up post-COVID across all the markets. This appears to be something that is industry-wide, as people are spending less time locked down at home and in front of their screens.

#2 – Gaming expectations weak for 2022

More worryingly, Sea Limited expects the weakness in its gaming business to extend into the year ahead. As a result, gaming bookings are expected to fall to US$3bn in 2022, sharply below the US$4.6bn achieved in 2021.

Apart from the headwinds from re-opening, the lower bookings is also due to the recent ban of its highly popular Garena Free Fire game in India. When asked if the game could be reinstated in India, management of Sea said that the situation is highly uncertain even as they are working on it.

#3 – E-commerce losses continue to widen

In its other key business, Shopee’s losses continue to widen as the company invests for growth. Losses at the EBITDA level rose to US$877mn in 4Q21, compared to US$684mn in the previous quarter.

Here, the company expects that certain markets such as Southeast Asia and Taiwan will achieve positive adjusted EBITDA before HQ cost allocation by 2022. However, the investments in other markets have yielded less certain outcomes. For example, Shopee will be pulling out of France in March, barely a few months after its maiden entry into the European market.

What would Beansprout do?

In the near term , the outlook for Sea remains highly uncertain as its key gaming business faces headwinds from re-opening and regulatory risk in India. Coupled with the general weakness in tech stocks amidst inflation concerns, it might seem like Sea will need to do more to show investors that we have seen the bottom.

Check out our article When will the bad news on Sea Limited stop? to understand more about market concerns on the stock.