(Bloomberg) — Shares of Sea Ltd. fell. by 26% after the Asian tech company reported revenue that missed analyst estimates and said it plans to invest more, a move that could erode profit margins.
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Second-quarter sales grew just 5.2%, underlining the effects of reduced promotional spending on e-commerce and a 41% drop in gaming revenue. CEO Forrest Lee said the company intends to expand Sea’s online shopping arm, Shopee, and that “such investments will have an impact on our bottom line and could result in losses.”
Stocks traded in the United States fell to $41.84 in New York Tuesday morning, the biggest drop ever for the day.
Sea focuses on profitability over the pursuit of growth at a time when consumers remain reluctant to spend. But in a notable shift, Lee has made an exception for e-commerce. Competition from Lazada, a subsidiary of Alibaba Group Holding Ltd. , along with newcomers like TikTok from ByteDance Ltd. Alibaba grew its international business by 41% in the June quarter, while TikTok is expanding aggressively in key markets such as Indonesia.
Singapore-based Sea embarked last year on an aggressive cost-cutting campaign to reverse years of losses, pivoting to focus on net income with revenue growth slowing from triple-digit percentage rates just two years ago. The company froze salaries and cut hundreds of millions of dollars in sales and marketing expenses to generate positive cash flow.
The company, the largest internet company in Southeast Asia and the best-performing in the world for a while, is stepping back from aggressive global expansion to focus on its core operations to win back investors. Last year was one of the toughest for Sea since its founding in 2009: It has shed some $160 billion in market value from its peak in October 2021 as the market turns against money-losing tech companies.
Read more: Sea’s road to profit is paved with layoffs, single-ply toilet paper
Second-quarter sales were $3.1 billion, missing analyst estimates of $3.2 billion on average. Shopee’s revenue growth slowed to 21%, its slowest pace ever. Revenue from SeaMoney, the digital financial services business, increased by 53%. Net income came in at $321.6 million, according to Bloomberg calculations based on first-half figures, beating estimates.
The stiff competition is affecting the profitability of Sea and regional peers GoTo Group and Grab Holdings Ltd. , which are also trying to deal with slowing economic growth, rising costs and lower valuations of technology companies. Grab and Indonesia’s GoTo Group continue to bleed losses.
Earlier on Tuesday, GoT cut its 2023 loss forecast after stemming some bleeding in the most recent quarter, bringing the Indonesian company closer to its goal of entering the black market after an era of costly expansion. Grab is scheduled to report its second-quarter results later this month.
What Bloomberg Intelligence says
Sea should be able to maintain profitability after its third consecutive quarter of net income in the second quarter — despite missing agreed sales of 3% and e-commerce revenue of 6% — under continued cost discipline and monetization of e-commerce, as we think. While sales trends could continue with a decline in promotional incentives and inflation-driven spending online shopping, gaming users, Sea’s biggest profit driver, are rebounding.
Nathan Naidoo, analyst
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In the long term, Sea hasn’t completely withdrawn from global markets, and its Latin American operations could help drive growth, said Nathan Naidoo, an analyst at Bloomberg Intelligence.
“Sea’s e-commerce expansion in Latin America may bring sales growth back to a record high after a deliberate slowdown to break-even,” he wrote in a note before the results.
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