Shopee is on track with its sustainable growth strategy.
Sea Limited (SE 0.55%) reached a new height in 2023 as it delivered its first-ever profitable year. Investors were delighted, sending the stock up by 90% since the beginning of the year.
While there are several reasons to be optimistic about Sea’s prospects, investors were particularly positive about the recent progress in Sea’s e-commerce business, Shopee.
Shopee is back on its growth trajectory
The last few years have been a roller-coaster ride for Shopee. Launched only in 2015, Shopee was expanding rapidly, but the COVID-19 pandemic gave it another considerable boost. Revenue surged by 160% in 2020 and jumped 136% in 2021.
While investors were delighted by Shopee’s seemingly limitless growth opportunities, it did come at a massive cost to Sea as the parent invested all of the profits from the Garena game development segment, and more, to sustain the hypergrowth rates. Unfortunately, the good time didn’t last long. Garena faced two declining years of revenue and profitability while external cheap money dried up.
Almost overnight, Shopee’s strategy went from growth at all costs to self-sufficiency and profitability, slashing investments and reducing costs. As a result, the revenue growth rate fell to a low of 16% in the third quarter of 2023 due to a 5% increase in gross merchandise value (GMV). For Sea’s die-hard supporters, such a growth rate was unacceptable since groupwide revenue grew at a disappointing 5% that quarter.
Shopee pivoted toward growth again toward the second half of 2023, leading to more robust performance in the recent quarter. For perspective, revenue jumped 33% on the back of a 57% rise in orders and a 36% increase in GMV in the first quarter of 2024. While still in the early days, Shopee’s recent solid performance gave investors optimism that the e-commerce company is not done yet with its high-growth days.
Shopee kept its losses at a manageable rate
One of the biggest concerns investors have as Shopee recalibrated itself to growth mode is that it would drag Sea’s profitability back into the red. So far, however, Shopee has shown that it wants to grow more sustainably.
For instance, Shopee’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at a negative $22 million in the first quarter of 2024, with its Asia markets recording a $12 million profit offset by losses in other markets. While adjusted EBITDA fell from a positive $208 million a year earlier into the red, such a loss was insignificant compared to Sea’s total adjusted EBITDA of $401 million in that quarter.
Many things contributed to Shopee’s ability to balance growth and profitability. One is that Shopee benefited from economies of scale, leveraging the fixed cost structure to serve more customers (and orders). For instance, in Brazil, Shopee reduced its contribution margin loss per order by 87.9% year over year to a negative $0.04 for the quarter.
The other reason is that the company has become more cost-sensitive as it underwent a turbulent period from 2022 to 2023, where it had to shut down businesses and slash head counts. Such an experience would likely have cemented the right culture for the company to remain lean even as it rekindles its growth mode.
Shopee is well positioned for growth
With Shopee back in growth mode, there are good reasons to expect the recent momentum to sustain for a while.
Externally, Shopee is well positioned to ride the ongoing growth in e-commerce penetration in Southeast Asia and Brazil. Besides, these countries have favorable demographics, which could sustain high GDP growth for many years ahead, leading to higher retail spending over time.
Moreover, as Sea has gotten back in shape financially — it reported an adjusted EBITDA of $401 million in the latest quarter and has a solid balance sheet of $8.6 billion in cash, cash equivalents, short-term investments, and other Treasury investments — it has all the financial means it needs to sustain Shopee’s growth momentum.
What it means for investors
Shopee had a turbulent two years as it repositioned itself for more sustainable long-term growth.
While there are early green shoots with its recent pivot, investors should monitor Shopee’s execution in the coming months. Ideally, investors want to see Shopee sustain its growth while maintaining a healthy bottom line.