Revenue growth at Sea Ltd. is set to grind to a halt, a dramatic reversal of the triple-digit percentages that once made the gaming and e-commerce giant a symbol of Southeast Asia’s internet boom.
The company is likely to post a 5.8% year-on-year decline in sales for the December quarter when it reveals its results on Tuesday, based on the average of analysts’ estimates. That would be the first decline on record and reflects a retreat from markets in India, Latin America and Europe, as well as a salary freeze and other austerity measures to drive profitability over market share growth.
Even if Sea squeezes out a surprise revenue gain, it’s a painful turnabout for the company, the largest of Southeast Asia’s internet firms and briefly the world’s best-performing stock. Investors two years ago piled into the company, which was backed by Chinese internet giant Tencent Holdings Ltd. and riding high on a pandemic-era boom in online use. Then came a post-Covid hangover of rising inflation and worries of a recession that wiped out about US$166 billion ($223.13 billion) of its value since a peak of US$202.6 billion in October 2021.
“Interest rates will likely stay higher for longer as inflationary pressures persist, creating a challenging year for the internet sector” in Southeast Asia, said Ju Ye Lee, an economist at Maybank Investment Banking Group in Singapore.
Sea investors may not be overly concerned for now about rapidly dissipating growth, and may instead focus on the bottom line on Tuesday. Sea has consistently shrunk losses in recent quarters by undertaking brutal measures including cutting thousands of jobs and freezing salaries pretty much across the board.
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But the revenue decline is emblematic of how investors’ love affair with the region’s internet firms is cooling rapidly. That decline was encapsulated last year by the collapse of Zilingo Pte, alongside the stunning share selloffs that engulfed Sea’s peers from Grab Holdings Ltd. to GoTo Group. For now, investors will be gauging how well Sea’s units Garena and Shopee rein in costs. But longer-term, they will want to hear solid plans to recapture some of the heady growth that made Sea a stock market darling in years past.
What Bloomberg Intelligence SaysShopee arm’s market leadership and scale should draw more merchants into higher-margin, transaction-based services, helping raise take rates and e-commerce revenue. These, along with lower staff costs amid job cuts and promotional spending, could reduce Sea’s 4Q net loss to about US$400 million vs. 4Q21’s US$484.8 million loss.- Nathan Naidu, analyst
Among Sea’s efforts to curb costs is a potential disposal of Garena’s Phoenix Labs unit. Acquired for more than US$150 million in 2020, the Vancouver-based indie developer of monster-hunting title Dauntless is getting bought out by its management, GamesBeat reported. A representative of Phoenix Labs, when contacted for comment, said the company doesn’t have any more information to share beyond what has been reported.