Due to the nature of start ups (particularly tech start ups), investors have become desensitised to seeing losses on the balance sheet. Getting in early before the company blossoms fully has been an attractive strategy over recent years, and parenthesis on financials no longer deter investors.
However, just how much premium should investors be willing to pay for loss-making companies?
One company that’s seriously testing the waters is Singapore tech gaming and e-commerce play Sea Limited.
In its most recent quarter, the company not only reaffirmed a net loss but announced said loss increased 10.2% to USD 434 million.
Yet, its stock price rallied over 6% shortly after it announced its earnings and remains on an upwards trajectory.
Taking a further step back, Sea’s stock performance has even outperformed its rivals. Rising over 55% YTD, Sea has put Nintendo (-25.01% YTD), JD.com (-27.62%) and Alibaba (-32.13%) to shame.
But what’s causing its success?
Garena, Sea’s online games developer is partly the reason. The developer is the team behind Free Fire – the world’s most downloaded mobile game in 2019 and 2020.
To date, Garena is the only profitable division of Sea, bringing in USD 598 million in operating income in its most recent quarter; up almost 4x from its USD 167 million figure a year ago. Revenue accounted for USD 1.02 billion this quarter, compared to USD 384 million last year.
Garena’s monetary growth is truly remarkable, reflecting in its astounding player figures. Free Fire recently surpassed 1 billion downloads on Google Play and ranked third by average monthly active users for mobile games.
Tencent’s ever popular PUBG Mobile was even dethroned by Free Fire as the top battle royale game in the US after generating USD 68 million in 1Q 2021 compared to Free Fire’s USD 100 million.
By not casting its net too wide, like a competitor such as Nintendo, and just focusing on online multiplayer games, Garena’s strategy has paid off. They’re also not hampered by the global chip shortage.
However, the sustainability of the model is questionable.
As mentioned, at one point PUBG was the most popular game until Free Fire came along. What happens when the next mobile game challenges Free Fire?
Sure, Garena has the ability to launch new titles but as it stands, having all their eggs in one basket is risky.
In terms of Sea’s e-commerce game, Shopee accounts for the group’s largest share of revenue, growing 161% to USD 1.16 billion in the latest quarter. However, its operating loss expanded from USD 345 million to USD 628 million. Shopee is spending cash quicker than Singaporeans when the ringgit drops against the Sing dollar.
So if Sea is somewhat limited in its gaming sector and its main revenue maker is increasing its loss, where exactly is its value?
SEA Relatively Untapped
The answer analysts and bulls are offering is: South East Asia (SEA).
With political instability in Hong Kong and regulations constraining China, investors are increasingly turning to nearby areas. As a potential HK-finance-hub-replacement, Singapore is at the heart of the conversation, with companies positioning themselves in the Lion City to gain unrestricted access to SEA.
Sea, which pays homage to the SEA region in its name, is looking to dominate the region.
Shopee is already the largest e-commerce platform in SEA and Taiwan. Although loss making, Shopee’s revenue growth is vastly outperforming Chinese competitor JD.com.
In 2018, 2019 and 2020, JD.com’s revenue grew 28%, 25% and 29% respectively. Meanwhile, Shopee’s revenue grew 100%, 163% and 101% over the same periods.
SEA’s ecommerce market is expected to triple within the next few years and Shopee is primed to lead the way. The region’s digital economy is valued at USD 100 billion as of 2020; Sea already has USD 35.4 billion of that through Shopee.
It understands its market too – its focus on fraud protection in providing 100% money-back guarantee gives it an edge over its Chinese rivals.
Whereas Alibaba and JD.com accommodate Chinese users first, Shopee puts SEA customers as their top priority. For example, Shopee’s Indonesian site features a “Muslim fashion” category.
Garena is also positioned to capitalise on the region by creating its own titles and reducing its dependence on licensed games.
Sea is currently valued at about USD 165 billion but some analysts are predicting it to be a trillion-dollar company by 2030 if its revenue reaches USD 200 billion.
Those who are bullish on Sea are incredibly bullish, which explains the company’s phenomenal stock price growth.
However, Sea has exposed the lucrative potential of SEA, and it’s surely a matter of time before other companies jump aboard.
With an e-commerce platform burning a hole in its pocket, being kept afloat by a gaming company with only one major title, does Sea have enough stamina to lead the pack?
For now, it’s certainly enjoying its unique position by giving global investors exposure to the SEA region like no other publicly listed company before it.