Sea Ltd – the parent company of Shopee and Garena – is Singapore's largest company by market capitalization at over US$100 billion.
But just three months ago, in mid-October, it was valued at around $200 billion – more than all Singaporean banks (DBS, OCBC and UOB) combined.
As I previously reported, Sea's leading growth driver, Shopee, has performed exceptionally well in 2021, beating expectations and even eclipsing Alibaba's entire international (excluding China) e-commerce business, which is made up of brands such as AliExpress, Lazada and Trendyol (together).
So what's up with Sea? Is the company losing momentum as the world tries to live with Covid-19? Has it lost investor confidence and sent their money to greener pastures? Does this mean trouble for Shoppe?
However, his situation offers an excellent lesson in why companies shouldn't be judged by their market capitalization.
Sea's stock performance over the past year, highlighting its 50% decline since October / Photo credit: Google
It's a far cry from what bank analysts were forecasting just two months ago, with expected prices still ranging between $380 and $416 per share as recently as mid-November.
In fact, the slump is so bad that it has completely wiped out the gains recorded throughout 2021, leaving the company 20 percent below where it started the year in mid-January 2021.
Then, as of 2022, Sea was roughly where it closed in 2020.
This is despite the company's good performance over the year and no new information has been released that would materially change that. At least no new information about Sea itself…
A rising tide lifts all boats…
…but the opposite is also the case. When the tide recedes, all boats go down with it.
The share price is only partially dependent on the performance of the company. The other big factor is the general market environment — and for most of the past two years, paradoxically, it's been very benign.
Since the early 2020 slump, governments around the world have deployed fiscal and monetary stimulus, desperate to prop up the economy.
Much of this freshly minted cash, particularly in America, found its way into the stock market and cryptocurrencies (in the absence of other good investments).
Performance of the S&P500 index, which tracks America's 500 largest companies / Photo credit: Google.
Between the bottom of the pandemic-induced low in March 2020 and the current highs, the index, which tracks America's 500 largest companies, rose over 100 percent. That's less than two years.
To figure out how long it previously took to record a similar gain, peaking in February 2020, we would have to go back to the fall of 2013.
In other words, America's stock market rose as much between 2020 and 2022 as it had previously risen between 2013 and 2020 – in the midst of a global pandemic and the worst disruption to human activity in a century.
Some of the companies have clearly excelled and benefited from the delivery of digital services while millions of people remained confined at home or severely reduced outdoors. But in general, stocks have been largely decoupled from underlying economic troubles.
Where exactly does that stand for Sea?
sea ltd is one of the biggest winners from the pandemic as both its digital entertainment and e-commerce businesses benefited from the pandemic as the internet was the only window on the world open to people.
His performance backed that up with rapidly growing sales even as the company is still losing money trying to gain market share.
Shopee quarterly sales more than tripled in a year and a half / Data source: Annual Reports
But just as Shopee's growing sales and debuts in new markets in Europe and India have sparked interest in the company, it has undoubtedly benefited from the excess cash sloshing around in the market, taking its stock to nearly $400 per share increased.
Today, as inflation grips many developed markets — including the US, where it hit 7 percent in 2021, the highest level since 1982 — money seems to be retreating from the stock market, especially as the US Fed hikes interest rates and is likely to be rolling Support quantitative easing program launched after the 2008-09 crisis (which was largely an unorthodox money printing operation).
As a result, starting in January, headlines like this one began popping up from Bloomberg:
Photo credit: Bloomberg
So as you can see, Sea is not alone. In fact, almost half of the companies listed on the Nasdaq index (previously 40%) have lost 50% or more from their highs, which were recorded in 2021 – just a few months ago.
In other words, it's not Sea that has a problem, it's the entire stock market.
How does this affect the future of Sea?
If the company is doing relatively well, what does that mean for the years to come? Well, it has successfully raised around $9 billion since the end of 2020, which is enough to keep it going for the next few years.
It took full advantage of its high valuation by raising capital around its stock tops and avoiding unnecessary ownership dilution just before the market took a nosedive.
Photo credit: Finding Alpha
At this point, current stock prices will not be their primary concern, especially since everyone else is affected as well.
A bigger challenge – although still one that would end up hurting everyone – is the possibility of an economic downturn, as governments around the world feel the brunt of high inflation and are forced to fight it.
A stock market crash — which isn't out of the realm of possibility in the next year or two — would certainly lead to a larger economic crisis, affecting millions of people and resulting in reduced spending long before Shopee is able to break even achieve (or make a profit).
So far, the platform is doing well to gain a foothold in their new markets, as evidenced by traffic numbers to their respective sites:
Shopee managed to land over four million visitors in Poland, its first EU market, during the holiday season / Photo credit: Similarweb
Despite controversy in India, Shopee is rapidly gaining new users due to its Chinese co-ownership through Tencent / Photo credit: Similarweb
In Brazil, Shopee has added over 20 million new monthly users (up 45 percent) over the past six months, while the market leader – Mercado Livre – has lost 12 million despite the holiday season, which usually boosts numbers. / Photo credit: Similarweb
timing is everything
Success in business isn't about being the first or the biggest, it's about the right timing.
Some of the biggest brands in the world eventually collapsed. Some of those first to market failed before successors took over (Facebook wasn't the first social media site, Google wasn't the first search engine, Apple wasn't the first or largest personal computing company) .
In Sea's case, it's certainly not the first e-commerce platform, but it appears to be one that's perfectly timing its operations, even when its big rivals are struggling (like Alibaba-owned Lazada and Alibaba itself).
The Singapore startup has made the most of the pandemic, catapulting itself among the world's largest companies and raising significant amounts of money just before the opportunity closed favorably.
Therefore, no matter what the immediate future holds for all of us, it is one of the (young) companies that is best prepared.
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Credit for selected images: Reuters