Is it a neocloud? A hyperscaler? Sea’s AI move puzzles investors

Sea’s Forrest Li stunned tech watchers and industry analysts last month with a memo that announced what no one expected: an expansion into the cloud business.

The 700-word document left industry watchers with more questions than answers.

Image credit: Ulla

“Management has given no timeline, capex budget, pricing, or revenue target,” Sachin Mittal, global head of technology and telecom research at DBS Bank, wrote in a note dated October 23.

Is Sea trying to become a hyperscaler that competes with the likes of Amazon Web Services and Google Cloud, or does it want to be a neocloud that rents out graphics processing unit (GPU) capacity?

Does Sea aim to provide AI-based compute or general-purpose compute, or does it intend to target SMEs that are already part of its gaming and ecommerce ecosystems like Garena and Shopee?

And what business does an ecommerce, gaming, and fintech company have in the world of cloud services?

Analysts and investors interviewed by Tech in Asia questioned whether this was a sound move, given the high capex involved, notwithstanding the over 10 years of experience Sea claims to have in building and running its own cloud platform.

On the day of the announcement, the stock fell 9.4%, closing near its 52-week low of US$77.05. The stock closed at US$76.77 on November 3.

“You’re talking about the world that’s dominated by US companies, or Chinese companies,” says a cloud veteran who requested anonymity, as they are not authorized to comment on competitors. “There’s no other place in the world where you’ll see a hyperscaler that’s relevant – that doesn’t come from those places.”

Tech in Asia reached out to Sea for more details about its enterprise cloud plans. But a representative of the firm pointed us to the now-public memo Li sent to employees on October 20.

DBS’ Mittal noted that while monetizing its in-house infrastructure business could build Sea an approximately US$1.2 billion revenue business by 2030, this “comes at a near-term earnings cost.”

Issues in ecommerce

Mittal thinks the reaction in the stock market isn’t solely attributable to the cloud announcement.

Instead, he sees Sea’s foray into cloud as an indication of “more issues in the ecommerce business.”

Huge capex spend

Serving a niche market?