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Fall of the world’s hottest stock costs Sea founders US$32b

Published Mon, Nov 14, 2022 · 07:35 AM

SEA Ltd’s pain was supposed to be short term.

The maker of wildly successful battle royale game Free Fire knew that the pandemic-fueled boost in users was over, but chief executive officer Forrest Li was still optimistic earlier this year that problems would be short lived.

He considered his company to be internally strong and had taken steps to maximise long-term potential – including spending more on growth.

Instead, Sea is now dealing with an economic slowdown and surging inflation, as well as intensifying competition and a broader tech selloff. The gaming and e-commerce giant has slashed jobs, shuttered operations in some European and Latin American markets and reduced expenses.

After a brief moment last year as Singapore’s richest person with a US$22 billion fortune, Li’s wealth has plummeted, according to the Bloomberg Billionaires Index. He’s now worth just a little more than US$3 billion as Sea shares have slid 87 per cent from their peak.

Co-founders Gang Ye and David Chen are down a combined US$13.5 billion, with Ye’s wealth – once US$12 billion – now about US$2 billion and Chen no longer a billionaire. Along with other top executives, the three have given up their salaries until the company reaches “self-sufficiency,” without specifying when that might be.

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It’s a stark reversal for what once was the world’s hottest stock. Now analysts estimate Sea’s quarterly loss will widen when it posts results on Nov 15.

“Challenges are abundant,” said Ke Yan, head of research at Singapore-based DZT Research. “It has to prove that e-commerce can be profitable. Then it needs to show that it is able to launch more hit games to drive the growth in the gaming segment. It is not conclusive for now.”

Li is among the billionaires whose wealth surged at an eye-popping rate during Covid before crashing as the world moved on from the pandemic.

Zoom Video Communications founder Eric Yuan, the father-son duo behind used-car dealer Carvana and Stephane Bancel, Moderna’s CEO, saw similar declines in fortunes.

A native of Tianjin, China, Li moved to Singapore after finishing an MBA at Stanford University and founded Sea – then called Garena – as an online games provider in 2009.

Emboldened by the global success of Free Fire, the company branched out into e-commerce. Its Shopee platform is now driving growth, accounting for more than half of the US$2.9 billion in second-quarter revenue.

In late 2020, Sea won a digital-banking license in Singapore to accelerate its push into financial technology. But soon came a series of setbacks, just as Sea’s expansion led to mounting losses.

In January, Tencent Holdings, its biggest backer, trimmed its stake and India announced the following month it would ban Free Fire.

Shopee pulled out from the market, as well as from France and Argentina, among others. A Sea representative declined to comment for this story. 

While Li was still optimistic in March, he’s since changed his tone. He conceded in September that the current difficulties were not a “quickly passing storm,” and are likely to persist into the medium term.

With weaker gaming demand and Shopee’s reduced reach, analysts estimate Sea’s adjusted loss before interest, taxes, depreciation and amortization will widen to US$453.6 million in the third quarter, data compiled by Bloomberg show. Revenue is projected to grow to US$3 billion from US$2.7 billion a year earlier.

Ark Investment Management’s Cathy Wood is among those who have exited: Three of her funds have been offloading Sea shares, with just one still holding the stock.

While the cost cuts show the company has put a new focus on profitability, investors will scrutinise Sea more closely than its regional peers because it’s a more mature business, said Bloomberg Intelligence analyst Nathan Naidu

Sea has been publicly traded since 2017, while ride-hailing and delivery firm Grab Holdings and Indonesia’s biggest tech company, GoTo Group, only listed in the past year.

“Investors are potentially starting to look at Sea as less of a growth stock,” Naidu said. “There’s a lot more pressure on Sea to achieve profits.” BLOOMBERG


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