Sea Ltd (NYSE: SE) stock is down 22% on the latest set of results. SE stock has fallen because the competition in its chosen markets appears to be entirely vicious. In the grander economic sense we like that - competition between producers is exactly what makes free market capitalism work, what makes consumers better off. At the more individual level of a company and its stock we of course hate competition. Thus Warren Buffett’s famed saying about always looking for the moat around an investment. What is there to stop competition from coming in and eating a comp[any’s lunch? If there isn’t that moat then someone will. Which is exactly what is happening to Sea Ltd.
The results themselves: “SE stock fell more than 20% Tuesday after Sea Ltd. (SE) reported third quarter results showing an unexpected loss. The Singapore-based internet services company said it is investing more, as the firm faces off with e-commerce competitors. For the quarter ended Sept. 30, Sea reported a loss of 26 cents per share on $3.31 billion in sales. On average, analysts polled by FactSet expected Sea to earn 12 cents per share on $3.17 billion in sales.”
We’ve looked at before at Sea Ltd: “The results were a falling short though: “The Singapore-based company earned a profit of 54 cents per share for the quarter that ended in June on $3.1 billion in revenue. Analysts polled by FactSet, however, were expecting sales of $3.26 billion and earnings per share of 65 cents. In the year-earlier period, Sea lost $1.67 per share on sales of $2.9 billion.” Viewed objectively those results are fine. Hey, a rise in sales, a switch from loss to profit, who wouldn’t be happy with that? Well, investors, obviously. Because people expected better. The Sea Ltd stock price already included the effects of those better results that everyone was expecting. Fall short of expectations - recall, again, the expectations already built into the stock price - and the stock price will fall.”
That was the last set of results which fell short of expectations - the stock price fell. This set of results fall short of expectations- the stock price falls. We’re seeing a pattern here, right?
Sea Ltd stock price from Google Finance
But here is what is truly worrying people. No one can really see any end to this competition problem: “The problem is, of course, that Shopee isn’t all that much different than its competitors — Lazada, AliExpress, Taobao or the latest entrant, Temu, as well as many local and regional challengers.” Sure, it’s entirely possible to build market share by burning capital. But if Teemu and TikTok are doing exactly the same thing in just the same markets then where is your moat now? “Earnings were worse than expected and shares also fell on CEO Forrest Li’s comments. “In this current period, we will prioritize investing in the business to increase our market share and further strengthen our market leadership,” Li said.”
The answer - we’re going to burn more capital gaining an unprofitable volume of business - is not exactly what investors wanted to hear. On the other hand, with Teemu and TikTok, what else can be done? As we’ve already pointed out, no wonder Warren Buffett likes businesses with a moat.
