Shopee’s parent company: The bubble is bigger than Tesla

* The article shows the views of Tim Culpan – the writer of Bloomberg Opinion in the field of technology.

Sea Ltd. is the parent company of Shopee and is a famous start-up from Singapore. Investors around the world will automatically tell themselves that they missed the chance due to the strong rise of this stock.

Even so, they should not feel any regret for “standing outside” when shares of the Southeast Asian internet company rose 395% last year. That is because, this explosive momentum is largely lacking basis. According to Yoolim Lee of Bloomberg News, this is the second best performing company among stocks worth more than $ 100 billion, second only to Tesla. The Sea stock is currently worth about 29 times its 2020 revenue and 16 times the estimated sales this year. Meanwhile, these figures of Tesla are about 21 times and 14 times respectively.

Sea’s fourth and full-year business results were just announced on March 2, highlighting expectations for a capitalization of $ 128 billion. Sea’s 2020 revenue is expected to double thanks to strong demand for e-commerce and online games. In the first three quarters of 2020, Sea reported revenue of $ 2.8 billion, more than double from a year earlier.

However, the group still carries a net loss of $ 1.09 billion, down from $ 1.17 billion in 2019. The company has been unprofitable for the past two years, while Tesla reported 6 consecutive quarters . In fact, Sea has never been profitable, and analysts predict the company will continue to do so for the next two years.

In general, for big bets on constantly losing businesses, investors seem to believe that remarkable growth will put Sea “in the right direction”, towards a suitable profit margin and Outstanding pricing.

At the moment, this company has two main businesses: entertainment and e-commerce. In addition, Sea also develops a third field that is digital financial services, mainly around payment services suitable for their online retail operations.

The startup’s engine of growth is e-commerce, with revenue in this segment nearly doubling in the fourth quarter and last year. However, the company remains unprofitable, not only because logistics costs or other fees are soaring, but also because Sea continues to spend a lot on marketing to boost profits.

On the other hand, the business that delivers solid profits is entertainment. Although the growth rate in this segment was slower, it was still quite impressive at 77.5% and boosted the company. The problem that makes Culpan interested is Sea’s dependence on the Free Fire game – an online shooting game.

According to Sea, Free Fire was the most downloaded handheld game globally last year – a record 2 years in a row. Although this is a really impressive feat, but investors still consider how long the company can “make money” thanks to the game above, before consumers get discouraged. Meanwhile, Sea is also trying to develop other titles – one of which will be more “picky” for players, but achievements like Free Fire are uncertain.

That final segment is financial services, which will likely be a turning point for Sea. However, the company is “burning money” for this area. However, Sea’s field bets could grow like Ant Group’s Alipay or Tencent’s WeChat Pay. They may make their services a popular payment platform, but they have to deal with tough competitors like Gojek, Grab and even Line.

Investors looking to bet on the growth future of this Southeast Asian digital startup have many reasons to trust them. However, trust won’t be able to defend such an impressive high valuation forever.

Consult Bloomberg