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Sea Limited (NYSE: SE) reached a milestone in 2023 as it delivered its first-ever profitable year. Revenue grew 5% to $13.1 billion, while net income reached $163 million, compared to a net loss of $1.7 billion in 2022.
However, there is a lot happening beneath the surface of these headline figures. After an incredible few years of growth at any cost, mounting losses sent Sea stock plummeting more than 80% from their all-time high in 2022.
Sea's e-commerce segment, Shopee, remains the company's biggest business, and last year, Shopee entered a new chapter of its growth story.
Shopee stepped on the brakes of its growth machine
Shopee was one of the fastest-growing e-commerce companies in the world during the COVID-19 pandemic. Riding the tailwind of global lockdowns, Shopee invested heavily in existing markets in Southeast Asia while also entering new markets like Brazil. Revenue jumped 160% in 2020 and another 136% in 2021.
Key to its growth was the enormous cash flow from its gaming company, Garena, and cheap external funding for its e-commerce venture. Shopee's growth-at-all-costs strategy, which helped it gain enormous market share, ended up proving too costly. For instance, Shopee's earnings before interest, taxes, depreciation, and amortization (EBITDA) loss in 2021 nearly doubled to $2.6 billion on $5.1 billion in revenue.
Sea hit several roadblocks in 2022 -- Garena's business contracted massively after economies reopened from pandemic restrictions and external financing became limited. Without its cash cow, Shopee had to change course fast. It exited loss-making markets, reduced subsidies, cut costs, and raised merchant fees. As a result, the e-commerce company reported EBITDA of $196 million in Q4 2022, reversing the year-ago period's $878 million loss.
Shopee's strategic pivot was vital as it demonstrated to investors the validity of its business model -- it could be profitable at scale. However, it came with its own cost as Shopee's growth slowed to just 16% in Q3 2023.
Shopee is accelerating its growth but at a more sustainable pace
Just a few quarters after pivoting to a greater focus on profitability, Shopee is again investing in its growth, and for good reasons.
First, Shopee operates in regions with low e-commerce penetration, so it makes sense for the company to capture as much growth as possible. If it doesn't do that, competitors will happily fill the void, and Shopee is already in first or second place in most of its markets.
Besides, e-commerce marketplaces like Shopee only become more dominant with increasing scale thanks to network effects. That scale will also help Shopee reduce its unit costs over time, making it cheaper to serve each user as it grows.