Sea Surges After Gaming Sales Defy Post-Covid Internet Slowdown

(Bloomberg) -- Sea Ltd. rose more than 14% after reporting core gaming revenue grew faster than expected, offsetting a slowdown across the rest of the Southeast Asian internet giant’s business as online activity retreats from pandemic-era heights.

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Sea’s gaming arm, its most profitable division, posted sales of $1.14 billion, versus projections for less than $930 million. Its shares climbed to their highest in almost two weeks, helped by a broader rally in New York.

But the Singaporean company’s large e-commerce business underperformed. Consumers emerging from prolonged lockdowns are cutting back on online purchases, especially with the war in Ukraine and rising interest rates clouding the global economic outlook. Sea revised its full-year outlook for e-commerce sales, its main source of revenue, to $8.5 billion to $9.1 billion from its previous guidance of $8.9 billion to $9.1 billion. The company also posted a wider loss for the first three months as expenses soared.

Overall, the results were better than feared, Citigroup analysts wrote. Investors are now betting on Sea’s overseas forays -- particularly into higher-growth arenas such as Indonesian commerce and fintech -- to shore up growth over the longer term. The company, backed by Tencent Holdings Ltd., should improve monetization in its online retail business after expansions into Latin America and Taiwan, according to Bloomberg Intelligence.

Sea Ltd ADRs Soar Following Results and Outlook: Street Wrap

What Bloomberg Intelligence Says

Sea’s strong cash position supports aggressive e-commerce and fintech global expansion plans, boding well for revenue growth from 2022, particularly after Covid-19 accelerated the digital boom in Southeast Asia, Latin America and other new markets. Fintech may contribute significantly to sales in the next few years as Sea integrates its financial-services and main businesses via a digital-bank license, bank subsidiary and partnerships -- aided by new-user acquisitions in the food-delivery sector. Having Tencent -- China’s largest social-network and games provider -- as an anchor investor, brings credibility to its strategy.

- Nathan Naidu, analyst

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Key Insights

• The pandemic triggered a rally in online shopping and gaming shares as consumers spent more time and money online, helping Sea become Southeast Asia’s most valuable company. But the broader tech selloff, the shutdown of its e-commerce operation in India and disappointing earnings have wiped 81% off its value since a peak in October.

• First-quarter revenue from Shopee, Sea’s e-commerce unit, rose 64% to $1.5 billion, versus estimates of $1.7 billion.

• Revenue from gaming arm Garena gained 45%. The company said in March it expects Garena to post $2.9 billion to $3.1 billion in bookings in 2022, set to be its first decline ever.

• Sea plans to diversify its portfolio across game genres, Chief Executive Officer Forrest Li said during a conference call. Moonlight Blade, a third-party massive multiplayer online role-playing game, is set to be introduced on mobile and PC in Thailand in the coming months after launching in Taiwan last year, he said. The company is also exploring publishing partnerships and making early investments in game studios.

• Revenue from SeaMoney, Sea’s digital financial services unit, more than quadrupled to $236 million.

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• Net loss in the first three months widened to $579.8 million from $422.7 million a year earlier. Total revenue climbed 64% to $2.9 billion, the slowest pace of growth in more than four years.

• Research and development expenses increased 141% to $340.4 million, mainly because of higher staff cost from increased headcount and investment in technologies.

• Sales and marketing expenses jumped 48% to $1 billion.

• Shopee’s gross merchandise value, the sum of transactions flowing through its platform, grew 39% to $17.4 billion.

• Total payment volume for Sea’s mobile wallet rose 49% to $5.1 billion.

• Sea Ltd Widens FY E-Commerce Revenue Forecast

Market Reaction

• Shares of Sea jumped 14.1% in New York on Tuesday. They are still down more than 60% this year.

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