SEA shares dropped almost 30% after Q2 earnings, here are our thoughts

Last night (15 August), Sea Group released their 2023 Q2 results. Again, profitable; again, missing consensus revenue/EPS targets.

Investor confidence seems to have taken a deep dent – the share price fell by almost 30% in the first trading day after the release.

As usual, here are some of our thoughts about SEA Group’s latest set of results. For comparison with other tech platforms, do refer to our “Apples to Apples: Benchmarking Shopee, Grab, GoTo and other major tech platforms” and “Apples to Apples 2.0: Benchmarking Major Tech Platforms Updated With Q4 And FY 2022 Results” reports:

1. Overall revenue growth is modest. The group reported a revenue of US$3.1 Billion in Q2 2023, a 5% increase YoY, but only a 1.8% increase QoQ (quarter on quarter). However, to put that in perspective – the growth from Q1 to Q2 in 2022 was 1.48%. (Cost cuttings started towards the end of Q2 2022).

2. Sea Group’s ecommerce arm, Shopee, reported a revenue of US$ 1.9 Billion in Q2, or 5% increase QoQ. In comparison, in Q2 2022 Shopee registered 15% QoQ Growth.

While Sea stopped reporting Shopee’s GMV numbers in Q1 2023, it did highlight an increase in commission rates (i.e. take rates) in the current release. Therefore, GMV growth should be lower than the revenue growth rate of 5%.

3. This is still better than its Indonesian rival Tokopedia, which released its own earnings on the same day and recorded a QoQ decrease of ecommerce GTV by 6% in Q2. You can read our thoughts on GoTo’s Q2 results here.

Many are asking – did TikTok Shop, which has a target to triple its own Southeast Asia GMV, take the market share away? Do look out for our TikTok Shop report launching next week 🙂

4. We predicted, or rather, expected Shopee to restart growth in our Ecommerce in Southeast Asia report released a few months ago. In Q2, Shopee indeed increased its marketing efforts – sales & marketing expenses increased by 23% QoQ to US$493.6 millions.

Forrest Li, SEA Group CEO shared in the earnings call that “we believe now is the right time to start reaccelerating our investments in growth”.

5. We’re also seeing more and more concrete evidence that Temu is indeed entering Southeast Asia. Temu, known for its relentless operational efficiency, will surely intensify the competition if (or when) it enters the region.

For more insights on Temu, check out our “Who is Temu” report.

6. Partners from our community have also shared that Sea Group is turning to other means to cut costs – general & administrative expenses decreased by 11.5% QoQ, and research & development expenses decreased by 11.6% QoQ – in hopes of remaining profitable even as it pivots towards growth.

7. As expected, the revenue for Garena (its digital entertainment segment) decreased by 1.9% QoQ to US$529.4 million in Q2. This comes as no surprise as Garena’s revenue has been dropping over the quarters, and investors had already come to terms with this.

As mentioned in our thoughts on Sea Groups Q1 results, the focus of Garena to increase the lifespan and peripheries of Free Fire seems to be out of necessity, not choice. No promising new game in sight.

8. The growth of Sea group’s Digital Financial Services (DFS) has also slowed down, with its revenue only growing by a modest 3.7% QoQ compared to a 18% QoQ growth in Q2 2022.

Interestingly, the total loans receivables for Q2 remained constant at US$2 billion, mirroring the figures from Q1. But we do not know if this indicates that lending growth is slowing down, or if they have an increase in alternative (off the book) funding sources for the loans.

9. After years of growth, the lending in Indonesia might be reaching its market potential with potentially smaller future growth in percentage terms. However, we should keep in mind that SeaMoney is also operating in markets like Brazil that have considerable untapped potential. SeaMoney could potentially seize these opportunities, as it did in Indonesia.

10. It is clear that despite Sea Group reporting a positive net income over the past 3 quarters, investors have yet to fully regain confidence in the company – the 29.4% drop of share prices is clearly a vote with feet.

Now that Sea Group is self-sustaining, they can afford to care less about investors’ short term sentiments and rather focus on boosting internal morale – especially as it faces growing competition from TikTok Shop, and highly likely Temu.

It will be interesting to see how the leadership team navigates through this, juggling between continuous growth and profitability, especially as competition intensifies in the region.

We will also be issuing a new version of Apples to Apples 3.0 once every platform company (Sea, Grab, GoTO, Uber, Doordash, Delivery Hero, Zomato, Meituan) covered there has released their Q2 results. Stay tuned!

If you are curious about TikTok Shop and its impact on the ecommerce landscape in the region, keep a lookout for our upcoming TikTok shop report. You can also join our exclusive online briefing “In focus: TikTok Shop” on 24 August 2023, 10am to 11am SGT.