Garena could fire Sea towards US$1t market cap dream, but Shopee growth plans weigh on near-term sentiment

[SINGAPORE] Plans by Sea’s e-commerce arm Shopee to focus on growth – at the expense of margins – could weigh on the Internet giant’s near-term prospects, analysts say.

But developments at gaming arm Garena and digital financial services arm Monee could lift Sea to a good third-quarter showing – and another step towards founder Forrest Li’s rallying call for the group to hit US$1 trillion in market capitalisation.

The way CGS International (CGSI) analyst Jacquelyn Yow sees it, Shopee has entered “a reinvestment phase for growth, specifically in logistics”.

This reflects its “focus on revenue growth over profitability” in order to maintain its market share, Yow said.

At the same time, Shopee has initiated a pilot trial to expand into Argentina, while fighting off fierce competition in the e-commerce space in South-east Asia and Brazil.

“With Argentina, it is still at a trial phase, so we don’t expect too much investments to happen in the near future,” said analysts Kuang Shi and Jasmine Bai of Hong Kong-based brokerage GF Securities.

On this, they see “less of a worry” as Shopee is becoming much more disciplined in new market expansion.

In Brazil, competitive dynamics among Shopee’s peers have been increasing over the last six months, with competitors reducing free shipping thresholds and offering higher incentives to sellers.

Amazon, for example, recently removed Fulfilled by Amazon fees for all sellers, and offered to reimburse seller commission fees of up to 30,000 reals (S$7,234) per month for new sellers in Brazil.

For consumers, it has also decreased its free shipping threshold, and expanded free same-day delivery for eligible items to Amazon Prime members in seven Brazilian cities.

Meanwhile, in South-east Asia, competition continues to be largely stable, though there are emerging risks such as Taobao’s renewed cross-border push. Players such as Tiktok and Lazada are also keeping up the fight for market share.

Maybank Securities analyst Hussaini Saifee believes that Sea is “prudently embedding guardrails within its indicated bear-case margin assumptions”.

While its peers have cut seller commissions, Shopee has raised the commissions it collects from merchants. These moves are putting incremental pressure on Shopee, but are ultimately good for its bottom line, Hussaini said.

For the third quarter ended September, CGSI’s Yow expects Shopee to report strong overall gross merchandise value (GMV) of 5 per cent quarter on quarter and 25 per cent year on year.

This is due to higher commission rates across South-east Asia and Brazil, and the introduction of platform fees in selected markets as part of Shopee’s monetisation strategy.

For FY2025, Yow forecasts GMV growth of 24 per cent year on year, driven by higher purchase frequency from existing users, and strategic reinvestments to bolster market share, should margins remain modest.

“We continue to believe investments in Shopee – such as logistics, content and customer service – will support robust GMV growth and strengthen its competitive moat, while its scale will help to build cost leadership,” said HSBC analysts Piyush Choudhary, Rishabh Dhancholia and Abhishek Jhanwar, forecasting a compound annual growth rate of close to 20 per cent over 2024 to 2027.

Investors, however, could lose sleep over how Sea intends to deploy its growing cash position alongside rising cash flows.

“From our conversations, it seems to us that investors are more worried about possible new market expansion given the capital requirements, uncertainties of ROI (return of investment) and Shopee’s previous history of expanding in three continents simultaneously,” said JP Morgan analysts Ranjan Sharma, Sigrid Qiu, Ritvik Agrawal and Alex Yao.

“Investors have a more favourable view of new services like Quick Commerce, which enables Sea to gain a larger share of consumer wallets, increase mind share and widen its competitive moat,” they added.

High-profile collaborations

While analysts are divided over Shopee’s growth plans, they are more positive on developments at Garena and Monee.

In general, the analysts agree that Garena’s strong content line-up is expected to deliver solid top-line growth, due to consistent double-digit bookings growth trajectory driven by user expansion, new game launches and deeper monetisation across its portfolio.

These boosted momentum, alongside special in-game events and regional esports competitions.

With high-profile collaborations such as Naruto and Squid Game, as well as high user engagement for Free Fire, Garena is set to see robust bookings in Q3. Yow estimates booking revenue to increase by 7 per cent quarter on quarter.

According to data firm Sensor Tower, Garena could see a 47 per cent increase in revenue in Q3, due to higher revenue from Free Fire and contributions from new game launches.

“We anticipate Garena bookings to remain robust, growing 45 per cent year on year, driven by the company’s investment to enhance in-game content and improve the user experience for Free Fire, along with positive contributions from new game titles such as Delta Force and Haikyu,” said the HSBC analysts.

Monee remains firmly growth-oriented, underpinned by healthy credit metrics and expanding penetration beyond the Shopee ecosystem. This includes off-Shopee SPayLater loans and cash loans, to broaden its customer base.

Margins are expected to moderate towards mid-20 per cent, due to lower interest yields driven by geographic mix and zero per cent first month introductory loans, higher sales and marketing spend to scale offline merchant adoption, and a mechanical increase in provision ratio as yields decline.

Maybank’s Husainee believes that these trends reflect “management’s deliberate reinvestment strategy to broaden ecosystem reach and sustain long-term investment growth”.

Towards US$1 trillion

For Q3 ended Sep 30, Sea is expected to report total revenue of US$5.6 billion and earnings before interest, taxes, depreciation and amortisation (Ebitda) of US$828.4 million, according to a Bloomberg consensus of 19 analysts as at Friday (Oct 24).

Sea is expected to release its Q3 results in mid-November.

Yow forecasts that margin compressions in Shopee and Monee will affect Ebitda, as Sea reinvests to support business expansion and market share gains.

CGSI has upgraded its recommendation on Sea to “add”, from “hold” previously, and raised its target price to US$185, from US$165 previously, as the brokerage banks on Sea’s reinvestment for long-term growth.

Meanwhile, Maybank has downgraded Sea to “hold” from “buy”, and revised its target share price down 28 per cent to US$172, from US$238 previously.

While Husainee expects Sea’s Q3 results to deliver solid topline growth, he advises investors to “take a pause until margin trajectory gains clarity”.

He reasoned: “With Shopee pursuing a more growth-oriented strategy amid competitive pressures, we expect margin improvement to slow.”

GF Securities, HSBC and JP Morgan have maintained their “buy” ratings, with target prices at US$173.11, US$200 and US$230, respectively. Sea has a consensus target price estimate of US$199.22, according to a Bloomberg compilation of 35 analysts.

In an Oct 20 memo to employees, CEO Li said Sea could hit US$1 trillion in market capitalisation – around 10 times its current value – on the back of artificial intelligence (AI).

In a change of tone from a year earlier, when Li warned of a difficult transition to AI, Sea has doubled down on the technology, integrating AI into its daily operations in areas such as customer service and gaming.

Shares of Sea closed at US$156.26 on Friday, down 0.31 per cent in the year to date.