Sea’s upbeat outlook on Shopee drives enthusiasm, but can it deliver?

Investors seem pleased with Sea Group’s fourth quarter and full-year 2023 numbers, which were released last week. The firm hit its first-ever profitable year, though it was in the red in Q4.

Shares in the New York Stock Exchange-listed company are up by 17% in the four trading sessions following the release of these results.

Much of the positive reaction had to do with a company guidance provided by management, especially in relation to its outlook for ecommerce arm Shopee, which led various analysts to raise the target prices for Sea.

In a nutshell, the firm’s management expects Shopee’s top line to grow and for the company to maintain its market share – despite strong competition – and to do so profitably.

See also: Sea hit first profitable year in 2023, eyes positive EBITDA for Shopee in H2 2024

DBS Bank analyst Sachin Mittal called the guidance “positive and surprising.”

The decision to provide such an upbeat guidance helped lift sentiment and convinced investors to look past a mixed set of results, particularly at Garena and SeaMoney, the group’s gaming and financial services businesses, respectively.

Full-year revenue at Garena, which has long been a cash cow for the group, was down by 44% compared to 2022. And adjusted EBITDA at SeaMoney experienced its first quarter-on-quarter decline since the third quarter of 2021. This was due to a doubling of sales and marketing expenses on its fintech business from the previous quarter.

Sea Group CEO and founder Forrest Li explained that the company was taking advantage of the seasonal uptick in sales during the fourth quarter to acquire new SeaMoney users, which will bring “better profitability in the long term.”

The billion-dollar question

Why is the market so focused on Shopee?

Over the years, the ecommerce business has accounted for an increasing share of Sea’s overall sales. Its share of the group’s total revenue between 2019 and 2023 has risen from 38% to 69%.

While the business is still loss-making, Shopee’s growing contribution to overall revenue – if the trend continues – should translate into earnings that are comparable to or even exceed those of Garena.

For example, if we were to apply the 10% adjusted EBITDA margin that Shopee achieved in the first quarter of 2023 – it’s highest to date – to its sales for the whole year, that would translate to around US$900 million in adjusted earnings. That’s compared to the US$921 million that Garena – which has an adjusted EBITDA margin of 42% – generated in that period.

Whether Shopee can consistently achieve the “if” above is the billion-dollar question.

Last year, Sea lost US$10 billion in market value following its results for the second quarter of 2023.

GMV growth in the high teens

Better bargaining power

No buybacks for now