SEA (formerly known as Garena)

[Big Toe]

Painful is an understatement. In a senseless race to the bottom, both shopee and Lazada suffered massively. Unless someone buys SEA/Shopee over, there is very little to be optimistic about. But who has such deep pockets? Softbank? Softbank is in a terrible position themselves and softbank already indirectly owns Lazada. What about a spin off?
Right now the market has no appetite for SEA money and Shopee. And their crown jewel gaming division is in decline.

Consider this. As of now, after the sell off, SEA is worth $40B USD. And it is burning a few B every few months. To get sales growth, massive cash burn is required, negative margins seems to be the norm. If you read their transcrip. It would appear that overall break even for shopee is nowhere is sight.

And even with the massive cash burn, Shopee is unable to provide sales guidance this year. I would assume the only to grow is to burn cash and right now even that is not enough to sustain the "sales growth".

[Wildreamz]

So much poetry in this thread. Interesting.

Right now, SEA depends a lot upon their gaming division, so they do not bleed too much cash as they get to scale.

Unlike AWS for Amazon however, game development is risky (a game might be a hit or a flop) and usually each title have a limited life-span, I don't think it's a reliable, ever-growing profit driver. That said Garena has been executing brilliantly last few years, I will not count them out completely to keep delivering hit games.

The runway for SEA's e-commerce to get to scale and profitability might be shorter than most think. Though there is definitely a path to get there. I think there are safer bets with larger upside. Eg. some of the FAAMNNG names.

2c.

(not vested, not investment advise)

Looking back (this original post was written when Sea was close to all time highs), nothing changed. 

Edit: For context, Sea's Digital Entertainment (including Free Fire) bookings this quarter is down 39% y-o-y, quarterly active user down 14% (https://cdn.sea.com/webmain/static/resou...raphic.pdf). I think it's clear now that Sea's gaming division, though executed well last few years, is not a reliable secular growth business, and cash-printer like Amazon's AWS.

(not vested)

[CY09]

The issue is how Shopee is executing its growth. It operates at a total negative margin where as it scales up it makes more losses.

Recently i bought a 3 in 1 USB cable which allows me to charge various USB phones at a price of $0 (retails at $5). There is no way shopee is making money on this and is paying for its delivery to me and 7 cents for me to put a nonsensical review (which I intend to). This is the business model which enables them to report $75 billion GMV. Lazada does not engage in such extreme negative pricing and hence is stuck at a $20 billion GMV.

Sea Money/Shopee pay is in this extreme problem. I have been using their 50 cents off at no min spend to purchase small value groceries at sheng shiong at either 100% discount or down to 20% discount. Sea is engaging in predatory pricing in its attempt to oust grabpay.

In three quarters since its equity raising, Sea has been burning 1 billion each quarter. Previously in 3Q 2021, I had estimated it will run into problem in 2025. However, the cash burn run has grown to 1 billion per quarter. With 7.8 billion in cash left + short term investments, it has accelerated to 2024 where Sea will run out of cash and need to do equity raising. Forrest Li is doing a pretty bad job in running the company, similar to Palantir's CEO.

The main problem for these 2 companies is that their admin and general expenses (where wages are classified) ballooned in their fight to hire more tech employees. It was evident in Sea Group where share based compensation grew by 65%. Paying your workers so high rate while your product is selling at negative margin is an implausible business proposal

[weijian]

The main problem for these 2 companies is that their admin and general expenses (where wages are classified) ballooned in their fight to hire more tech employees. It was evident in Sea Group where share based compensation grew by 65%. Paying your workers so high rate while your product is selling at negative margin is an implausible business proposal

Anecdotally back in 2021, I have had many co-workers leaving for these no-profit companies. Fresh out of school folks were earning comparable or more, than those with more established work records.

I am not too sure of the trend in 2022. But with the way that salary packages are rising for fresh graduates this year, I suspect that the double-down strategy is been persisted.

[CY09]

Hi Weijian,

It has persisted. Based on anecdote information, local tech workers who have about 10 years work experiences are paid the equivalent of MX9 and above Directors/Senior Directors of the Civil service (such civil servants would have 20-40 years experience).

https://www.todayonline.com/singapore/pa...ow-1936671

Such a payscale puts them equivalent to the pay of the top 3 executives in many listed SMEs based on annual reports.

[specuvestor]

Just to say that nothing has changed in business model in past 12 months yet SEA moved from larger market cap than top 10 STI stocks to 2/3 of DBS. Lesson on fundamentals vs timeline here.

The main thing that has changed is the cost of money and hence how much to finance those losses.

As per dot com, the Tech employees are highly sought after with boom in new start-ups from cheap PE funding. This will reverse in the next 12 months which supply doesn't really change that much. Nothing new under the sun

The issue is how Shopee is executing its growth. It operates at a total negative margin where as it scales up it makes more losses.

Recently i bought a 3 in 1 USB cable which allows me to charge various USB phones at a price of $0 (retails at $5). There is no way shopee is making money on this and is paying for its delivery to me and 7 cents for me to put a nonsensical review (which I intend to). This is the business model which enables them to report $75 billion GMV. Lazada does not engage in such extreme negative pricing and hence is stuck at a $20 billion GMV.

Sea Money/Shopee pay is in this extreme problem. I have been using their 50 cents off at no min spend to purchase small value groceries at sheng shiong at either 100% discount or down to 20% discount. Sea is engaging in predatory pricing in its attempt to oust grabpay.

In three quarters since its equity raising, Sea has been burning 1 billion each quarter. Previously in 3Q 2021, I had estimated it will run into problem in 2025. However, the cash burn run has grown to 1 billion per quarter. With 7.8 billion in cash left + short term investments, it has accelerated to 2024 where Sea will run out of cash and need to do equity raising. Forrest Li is doing a pretty bad job in running the company, similar to Palantir's CEO.

The main problem for these 2 companies is that their admin and general expenses (where wages are classified) ballooned in their fight to hire more tech employees. It was evident in Sea Group where share based compensation grew by 65%. Paying your workers so high rate while your product is selling at negative margin is an implausible business proposal

[Wildreamz]

Another thing that changed is Bookings and DAU of their most profitable business line (Digital Entertainment) is clearly on the downtrend. This was on a strong uptrend 12 months ago.

But this should not come as a surprise to investors familiar with gaming industry product lifecycle.

[EnSabahNur]

But this should not come as a surprise to investors familiar with gaming industry product lifecycle.

Is it possible for you expand on this? How does this impact their Digital Entertainment business?

Thank you

[CY09]

Sea only has one popular game in its digital entertainment business. that is free fire. It has peaked in popularity and now has a lower paying user population because the game becomes less popular and people move on to other games. Think of games like clash of clans, counterstrike where while it is popular has seen less users towards the tail end.

About gaming, I note Sea Group has started a new gamification of games through its e commerce platform. For example every 2 weeks, it has a few raffle events like with a winner each (this week has 3 events- a tablet, a wireless headset and a comestic product). All the user has to do is use shopee coins to purchase a ticket (can redeem any no of tickets). There are two ways to buy shopee coins - 1) shop more and get rebate in shopee coins or 2) use real world cash to buy an equivalent of Shopee coins with a cashback vouchers $1 real dollar can be changed for 100 shopee coins. This also applies to other shopee games where the first few to complete win real world products such as bird nests and their progress can be accelerated by using Shopee coins they have accumulated.

It seems this gaming mechanism does not violate Singapore gambling laws, despite shopee not having a permit for claw machines or a gambling license. It is a potential money generating segment as more and more people will try their luck to buy chances to win a real world product that is 1000 times or more the amount they pay upfront for their lottery tickets.

[Wildreamz]

But this should not come as a surprise to investors familiar with gaming industry product lifecycle.

Is it possible for you expand on this? How does this impact their Digital Entertainment business?

Thank you

Games are like movies, it has high initial investment cost, high execution risks (games developed might not be a hit), and then limited life span. Just like movies; if you get a hit, you get high return on initial investment when it was released; if you get a dud, you lose money.

Look at the numbers of SEA's digital entertainment division 12 months ago:


Now look at the numbers today:


This is the natural progression/life-cycle of a gaming business.

Another way to visualize this, check Google Trends:


See the same pattern?

(not vested)