Company Reports

We raise our fair value estimate for Sea by 28% to $60 per share after better-than-expected first-quarter revenue, gross merchandise volume, or GMV, and operating margin. Our valuation increase is driven by a less gloomy outlook for the gaming business, Garena, as well as slightly higher monetization and lower marketing expense forecasts for the e-commerce business, Shopee. The company’s revenue of $3.7 billion was 8% higher than our estimate, but more importantly, Sea was able to increase GMV by 36% year on year while raising its monetization by 40 basis points sequentially, with marketing expenses being 13% less than our forecast. We lowered our marketing expenses by 17% on average for the next 10 years, which contributes most of the valuation change.

We expect the Shopee e-commerce platform to be Sea’s main growth driver for the long term; the company’s valuation will be predicated on this business. We estimate Shopee has 30% share of its main market, Indonesia, and we estimate about 30%-35% share in the rest of Southeast Asia. It has built leading market share quickly using subsidies, free shipping, and incentives that attracted consumers to its platform, but in the process it incurred heavy cash burn and has not yet seen positive EBITDA. While positive macro signs exist and Shopee enjoys a market-leading position currently, we believe that it is too early to tell who the ultimate long-term winners will be. E-commerce is still in the early stages in Southeast Asia, and outside of a slight lead in market share, we do not see obvious distinct advantages for Shopee. As user growth has been highly contingent on subsidies that heavily increased sales and marketing expenses, we are concerned that growth could decelerate sharply once these incentives stop and when Sea becomes more focused on profitability.

We expect the Shopee e-commerce platform to be Sea’s main growth driver for the long term; the company’s valuation will be predicated on this business. We estimate Shopee has 30% share of its main market, Indonesia, and we estimate about 30%-35% share in the rest of Southeast Asia. It has built leading market share quickly using subsidies, free shipping, and incentives that attracted consumers to its platform, but in the process it incurred heavy cash burn and has not yet seen positive EBITDA. While positive macro signs exist and Shopee enjoys a market-leading position currently, we believe that it is too early to tell who the ultimate long-term winners will be. E-commerce is still in the early stages in Southeast Asia, and outside of a slight lead in market share, we do not see obvious distinct advantages for Shopee. As user growth has been highly contingent on subsidies that heavily increased sales and marketing expenses, we are concerned that growth could decelerate sharply once these incentives stop and when Sea becomes more focused on profitability.

We are raising our fair value estimate for Sea by 7% to $47 from $43 after it provided an outlook of adjusted EBITDA breakeven in second half 2024 while guiding to double-digit 2024 growth for gross merchandise volume. Our new fair value reflects a more upbeat outlook. Still, we also believe there are significant risks attached to its guidance where the market will significantly correct itself if Sea appears unable to meet its target. Despite the upbeat outlook, Sea failed to provide, in detail, its bridge to profitability, which leads us to believe it may encounter some challenges in meeting its guidance.

We reduce our fair value estimate for Sea by 20% to $43 from $54 after it posted an operating loss of $174 million, which was worse than the Refinitiv consensus profit of $21 million. The company is doubling down on further elevated sales and marketing expenses to reaccelerate its growth in e-commerce, which causes us to lower our operating margin forecast to 5% from 10% next year. We forecast e-commerce losses to continue but taper off in 2026, revised from operating profit in 2023. We reiterate our previous view that Sea and Southeast-Asian e-commerce peers will likely see challenges in achieving both profitability and durable robust growth at the same time.

We expect the Shopee e-commerce platform to be Sea’s main growth driver for the long term; the company’s valuation will be predicated on this business. We estimate Shopee has 30% share of its main market, Indonesia, and we estimate about 30%-35% share in the rest of Southeast Asia. It has built leading market share quickly using subsidies, free shipping, and incentives that attracted consumers to its platform, but in the process it incurred heavy cash burn and has not yet seen positive EBITDA. While positive macro signs exist and Shopee enjoys a market-leading position currently, we believe that it is too early to tell who the ultimate long-term winners will be. E-commerce is still in the early stages in Southeast Asia, and outside of a slight lead in market share, we do not see obvious distinct advantages for Shopee. As user growth has been highly contingent on subsidies that heavily increased sales and marketing expenses, we are concerned that growth could decelerate sharply once these incentives stop and when Sea becomes more focused on profitability.

On Sept. 25, Indonesia announced that it may regulate the use of social media to sell goods in the country, which we view as a move to prevent TikTok specifically from selling cheap goods and to ensure fair competition in the country’s retail industry. We view the proposed regulation as incrementally positive for GoTo, Sea, and other Indonesia-based e-commerce platforms in the long run. Despite the positive development, our fair value estimates for both GoTo and Sea are unchanged at IDR 75 and USD 54, respectively, given that we are unsure how enforceable the new law will be, and whether this means peers could step in and continue the aggressive competitive spending. Nevertheless, we believe that in the long term, the restriction of a major competitor poses a potential structural change to the profitability of e-commerce peers in Indonesia. This is incrementally beneficial for Sea and even more so for GoTo, as the latter is almost 100% leveraged to Indonesia, compared with Sea, where only about 40% of its e-commerce gross merchandise volume, or GMV, comes from Indonesia. This could potentially mean that the platforms will spend much less money on sales and marketing expenses in keeping up with competitors, which has been one of the key factors affecting profitability.

We expect the Shopee e-commerce platform to be Sea’s main growth driver for the long term; the company’s valuation will be predicated on this business. We estimate Shopee has 30% share of its main market, Indonesia, and we estimate about 30%-35% share in the rest of Southeast Asia. It has built leading market share quickly using subsidies, free shipping, and incentives that attracted consumers to its platform, but in the process it incurred heavy cash burn and has not yet seen positive EBITDA. While positive macro signs exist and Shopee enjoys a market-leading position currently, we believe that it is too early to tell who the ultimate long-term winners will be. E-commerce is still in the early stages in Southeast Asia, and outside of a slight lead in market share, we do not see obvious distinct advantages for Shopee. As user growth has been highly contingent on subsidies that heavily increased sales and marketing expenses, we are concerned that growth could decelerate sharply once these incentives stop and when Sea becomes more focused on profitability.

We are lowering our fair value estimate for Sea to $54 from $70 after the company reported second-quarter 2023 revenue of $3.1 billion that was 10% lower than our and consensus estimates. Not only did Sea miss revenue estimates but concerns over profitability resurfaced as the company indicated there could be periods of operating losses as it begins to focus on growth again. We believe Sea will again start ramping up subsidies and free shipping to defend its market share as a response to Lazada and ByteDance’s aggressive expansion into Southeast Asia. We previously reiterated that Sea will see challenges to achieving growth and profitability at the same time—however, there are now concerns over both metrics as we may see further losses, which is the main reason for our downgrade.

With reference to the July 27 Indonesian government regulation to ban imported goods under USD 100 on e-commerce platforms, our view remains and our fair value estimates for Sea and GoTo are unchanged at USD 70 and IDR 75, respectively. We reiterate our previous stance that both platforms will still likely have challenges on achieving both gross transactional value growth and profitability at the same time. While the new law is an incremental positive in the long term for both companies, there is no effect on their near-term headwinds which relate to how consumer demand is declining as a response to increasing commission fees and subsidy cuts on the platforms.

We reiterate our fair value estimate of $70 after Sea reported first-quarter 2023 results that continued to show profitability, but were overshadowed by an implied year-on-year decline in gross merchandise value that puts its long-term growth trajectory into question, in line with our thesis. We believe that profitability was attained at the expense of GMV decline, and this raises doubts about whether Sea can achieve both growth and profitability at the same time. A greater monetization rate contributed to profitability, along with a 60% year-on-year decline in sales and marketing expenses. While we are encouraged by the improvement, cuts to expenses and increases in monetization may not be feasible in the long term if GMV continues to decline. Our valuation assumes Sea can reach steady-state profitability while maintaining modest growth, but we believe there may be challenges in balancing both in the near term. This is compounded by long-term headwinds for Garena—we could see downward risks to Sea estimates if Garena continues to lose quarterly paying users, or if GMV growth remains muted. Given multiple risks to its business, we believe Sea’s upside is limited until it can show durable and profitable growth.

We maintain our fair value estimate of USD 70 for Sea despite the company reporting significantly better-than-expected profitability due to meaningful cost reductions and greater monetization of its e-commerce business. Sea improved its monetization by 300 basis points, which led to better-than-expected revenue. Combined with operating expense reductions stemming from mass layoffs in the prior two quarters, the company reported recurring operating profit of USD 452 million, compared with the PitchBook consensus estimate of a loss of USD 253 million. While we found its recent profitability encouraging, supported by its 22% share price surge on March 7, the day of earnings—and while the market may enjoy the strategic shift toward profitability—we believe the long-term revenue growth trajectory should now decelerate significantly, leading to a lower valuation despite higher margins. In addition, Sea did not address some of the fundamental issues of the company, such as the continued user and bookings decline of its gaming business and the lack of visibility into its financial services business (which has now transformed into a service provider).

We expect the Shopee e-commerce platform to be Sea’s main growth driver for the long term; the company’s valuation will be predicated on this business. Per Euromonitor, Shopee has 30% share of its main market, Indonesia, and we estimate about 30%-35% share in the rest of Southeast Asia. It has built leading market share quickly using subsidies, free shipping, and incentives that attracted consumers to its platform, but in the process it incurred heavy cash burn and has not yet seen positive EBITDA. While positive macro signs exist and Shopee enjoys a market-leading position currently, we believe that it is too early to tell who the ultimate long-term winners will be. E-commerce is still in the early stages in Southeast Asia, and outside of a slight lead in market share, we do not see obvious distinct advantages for Shopee. As user growth has been highly contingent on subsidies that heavily increased sales and marketing expenses, we are concerned that growth could decelerate sharply once these incentives stop and when Sea becomes more focused on profitability.

We are maintaining our fair value estimate for Sea at USD 70 after the company reported narrower-than-expected losses at Shopee, its e-commerce business, but mixed third-quarter 2022 results. Operating losses narrowed due to a combination of Shopee’s strong advertising revenue that helped increase monetization rate by 90 basis points to 8.6%, a reduction in sales and marketing expense, and 10% slash in mostly e-commerce headcount in the last six months. As a result, we are moving up our operating profit breakeven timeline for Shopee and the overall firm by one year to 2025. Despite an acceleration toward breakeven, Sea’s narrowing of losses likely comes at the expense of lowered growth. Gross merchandising value, or GMV, increased only 14% year on year and was flat sequentially, while the total number of orders was flat sequentially again and has been stagnant at 2.0 billion-2.1 billion for four quarters in a row. In addition, management is anticipating macro headwinds in the near term, and that it is “entirely” shifting its focus to profitability away from growth. As a result, we revise down our GMV growth assumptions, which reduces the future value creation opportunity and offsets the progress made toward profitability.

We are lowering our fair value estimate for Sea to USD 70 from USD 97 after a series of negative events in the past week have caused us to become less optimistic about Sea’s medium-term gross merchandise value, or GMV, growth, and the outlook for its gaming business. CEO Forrest Li sent an internal memo to Sea’s employees on Sept. 15, as reported by Bloomberg, stating that “negative conditions will likely persist into the medium term" and that it is focused on profitability in the next 12-18 months. Given the company’s expectations, we lowered our e-commerce growth and gaming revenue forecasts for the next five years—we now expect 2022 GMV to increase only 17% year on year, from 21%, which would imply only a 5% year-on-year increase for the second half. Li’s memo follows the shuttering or downsizing of parts of its operations that are likely to affect near-term revenue and long-term potential, and our downgrade reflects a structural change in the business where previous long-term expectations may no longer be tenable. We forecast Sea can still see breakeven in 2025 but find it challenging to achieve profitability without sacrificing its expansion vision. Thus, we lower our long-term outlook on market size by lowering GMV growth rates.

We expect the Shopee e-commerce platform to be Sea’s main growth driver for the long term; the company’s valuation will be predicated on this business. Per Euromonitor, Shopee has 30% share of its main market, Indonesia, and we estimate about 30%-35% share in the rest of Southeast Asia. It has built leading market share quickly using subsidies, free shipping, and incentives that attracted consumers to its platform, but in the process it incurred heavy cash burn and has not yet seen positive EBITDA. While positive macro signs exist and Shopee enjoys a market-leading position currently, we believe that it is too early to tell who the ultimate long-term winners will be. E-commerce is still in the early stages in Southeast Asia, and outside of a slight lead in market share, we do not see obvious distinct advantages for Shopee. As user growth has been highly contingent on subsidies that heavily increased sales and marketing expenses, we are concerned that growth could decelerate sharply once these incentives stop and when Sea becomes more focused on profitability.

We are lowering our fair value estimate for Sea to USD 97 from USD 125 after the company reported second-quarter revenue of USD 2.9 billion on Aug. 16, which was 13% lower than our estimate of USD 3.3 billion. Shopee, the e-commerce unit, reported revenue of USD 1.75 billion, which represented a 51% year-on-year increase but missed our estimate of USD 2.1 billion. The revenue miss prompted Sea to stop giving out further 2022 revenue guidance, which is the key factor in our fair value change. Last quarter, Sea guided for 2022 e-commerce revenue to be USD 8.5 billion-USD 9.1 billion, but so far in the first six months, Shopee has only generated USD 3.3 billion in sales—considerably less than half of its guidance. Compounded by a plateau in orders, deceleration in gross merchandise value, or GMV, and the outlook for its gaming business, we lower our near- to midterm GMV and revenue growth to reflect this quarter’s miss, which significantly reduces our fair value estimate. In addition, recurring operating losses widened to USD 731 million from USD 406 million year on year, which is also concerning, and moves out our breakeven assumptions later to 2026. The miss was also due to headwinds at Garena, its gaming unit, as Free Fire showed signs of decline as well as a lack of games in its pipeline. We believe that Sea can still benefit from Southeast Asia's long-term macroeconomic tailwinds, but it may be too early to see the recent pullback as a buying opportunity until there are improving signs of profitability. We believe execution risks are increasing with each quarter of revenue deceleration and heavy cash burn.

We expect the Shopee e-commerce platform to be Sea’s main growth driver for the long term; the company’s valuation will be predicated on this business. Per Euromonitor, Shopee has 30% share of its main market, Indonesia, and we estimate about 30%-35% share in the rest of Southeast Asia. It has built leading market share quickly using subsidies, free shipping, and incentives that attracted consumers to its platform, but in the process it incurred heavy cash burn and has not yet seen positive EBITDA. While positive macro signs exist and Shopee enjoys a market-leading position currently, we believe that it is too early to tell who the ultimate long-term winners will be. E-commerce is still in the early stages in Southeast Asia, and outside of a slight lead in market share, we do not see obvious distinct advantages for Shopee. As user growth has been highly contingent on subsidies that heavily increased sales and marketing expenses, we are concerned that growth could decelerate sharply once these incentives stop and when Sea becomes more focused on profitability.

Sea reported revenue of USD 9.96 billion on May 18, which reflected a 64% increase year on year and beat consensus, according to PitchBook, by 2% due to outperformance of its gaming business and more importantly EPS loss was better than expected at negative USD 1.05 per share versus negative USD 1.28 per share for consensus due to some stabilization of operating margins. While the stock rebounded 15% on May 17, our fair value estimate remains USD 125 as we view the results as an encouraging step toward profitability, and despite upside to our current fair value estimate, we recommend remaining on the sidelines due to uncertainty whether Sea can show further margin improvement as it faces increasing sales and marketing costs from expected shipping disruptions and intensifying competition.

We expect the Shopee e-commerce platform to be Sea’s main growth driver for the long term; the company’s valuation will be predicated on this business. Per Euromonitor, Shopee has 30% share of its main market, Indonesia, and we estimate about 30%-35% share in the rest of Southeast Asia. It has built leading market share quickly using subsidies, free shipping, and incentives that attracted consumers to its platform, but in the process it incurred heavy cash burn and has not yet seen positive EBITDA. While positive macro signs exist and Shopee enjoys a market-leading position currently, we believe that it is too early to tell who the ultimate long-term winners will be. E-commerce is still in the early stages in Southeast Asia, and outside of a slight lead in market share, we do not see obvious distinct advantages for Shopee. As user growth has been highly contingent on subsidies that heavily increased sales and marketing expenses, we are concerned that growth could decelerate sharply once these incentives stop and when Sea becomes more focused on profitability.