Quite unusually, both Alibaba and Sea Ltd. they released their latest quarterly results this week, after the Chinese giant cut its projections and delayed publication two weeks earlier in November.
And they make a relatively nasty read, having lost targets for two consecutive quarters and cut their forecasts for the entire 2022.
While much of the company’s problems stem from a slowdown in China and political repression against the country’s digital megacorporations by Beijing, the company has gone just as badly abroad.
Alibaba reached the ceiling
Their sales on the peninsula are still strong, but they seem to have reached the limit.
The company recorded a 33 percent year-on-year increase for Chinese retail trade, but with 126.8 billion RMB, it is 6.7 percent less than the quarter ended in June, when its revenue peaked at 135.8 billion RMB.
It’s a similar story overseas, with revenues falling to $ 1.65 billion from $ 1.67 billion in the previous three months, a decrease of 3.6 percent.
In fact, Alibaba has been at the same level of between $ 1.5 billion and $ 1.6 billion per quarter since early 2021, indicating that it has reached the limits of its growth outside of China at a time when competitors are advancing rapidly.
Meanwhile, Shopee’s parent company, Sea Ltd., has just posted revenue of $ 1.5 billion for the third quarter of 2021, up 134.4% year-on-year and 25% quarter-on-quarter (from about 1,200 million dollars in the second quarter).
Given the trajectory toward the fourth quarter of 2021 and the fact that this year it has been adding $ 300 million to $ 400 million per quarter, it seems certain that Shopee has closed that small remaining gap or has already surpassed Alibaba.
Unlike its Chinese competitor, Sea Ltd. increased its year-round projections for the second time.
Last quarter, it forecast up to $ 4.9 billion in e-commerce revenue and this quarter’s targeting places them at between $ 5,000 and $ 5.2 billion for the entire 2021, although given its current pace, much it might well exceed expectations again and even the US. The $ 5.5 billion is not out of the question.
This is especially likely given its recent entries into new markets in Europe and India, which, while small, will increase the company’s revenue during the usually busy end of the year.
The future is not without difficulties for Sea
While these results may seem like the company is doing very well, we can’t forget that its business model is based on the profits generated by Garena’s digital entertainment arm, which offsets some of the costs arising from the growth of other Shopee and Sea services.
As you can see below, after witnessing an increase in reserves during the pandemic, it appears that Garena’s growth is normalizing, which may also have side effects on Shopee’s growth.
In the event that the digital entertainment business suffers a drop in profit margins (which the sky doesn’t want), Sea’s overall performance could be hurt quite severely, and quickly, as the company continues to lose money by achieve market share elsewhere, especially in e-commerce.
It still has some pretty deep pockets right now, given its market capitalization, which has skyrocketed in the last two years and currently stands at $ 170 billion (with a good orientation more than $ 200 billion of entities such as Bank of America, Citigroup or UBS).
Thanks to this, last year alone it was able to raise about $ 9 billion and currently has about $ 11 billion in cash.
That said, progress in normalizing life with Covid-19 around the world is likely to cool the growth of digital services, which have received a huge boost with billions of people trapped in their homes during the pandemic.
The immediate future still looks bright, with an expected increase in e-commerce revenue of 51% more in 2022, which would bring them to more than $ 7.5 billion.
That said, achieving a stronger and more profitable foothold in more developed markets (e.g. in Europe) will cost the company a lot in the coming years, while it is still competing for market share in Asia and Latin America.
To manage them successfully, it must begin to make a profit among its more mature customers and free itself from the burdens that Garena has borne over the past two years.
Undoubtedly, Sea has made the most of the opportunity presented by the Covid-19, reinvesting everything it can to ride the wave. Now it’s about bolstering those gains, and the next two are likely to show us how stable and enduring Shopee’s worldwide presence will be.
Featured Image Credit: Reuters