Better Growth Stock: Sea Limited vs. Grab Holdings

Better Growth Stock: Sea Limited vs. Grab Holdings

Sea Limited (NYSE: SE) and Grab (NASDAQ: GRAB) are two of the biggest tech companies in Southeast Asia. Sea owns Shopee, the largest e-commerce marketplace in Southeast Asia and Taiwan, and the video game publisher Garena. Grab, which acquired Uber Technologies‘ Southeast Asian business in 2018, is the region’s largest mobility and delivery services provider. Both companies integrate their own digital payment services — SeaMoney and GrabPay — into their mobile apps.

But over the past 12 months, Sea’s stock price fell 38% while Grab’s stock rose 14%. Let’s see why the e-commerce and gaming leader underperformed the mobility leader — and if it will remain the weaker investment for the foreseeable future.

Singapore's skyline at night.

The Singapore skyline. Image source: Getty Images.

Sea faces an existential crisis

Sea’s revenue surged 101% in 2020 and 128% in 2021. Shopee’s sales soared as more people shopped online throughout the pandemic, while Garena’s Free Fire became the world’s most downloaded battle royale game for mobile devices. But in 2022, its revenue only grew 25% as both businesses faced tough post-pandemic slowdowns.

Shopee struggled with fierce competition from Alibaba‘s Lazada across Southeast Asia, and the macroeconomic headwinds drove it to shut down several of its overseas marketplaces in Latin America, India, and Europe. Garena’s Free Fire lost a lot of its paying users as the pandemic passed, and that slowdown was exacerbated by an unexpected ban in India — its fastest-growing market — which lasted from February 2022 to August 2023.

In 2022, Garena’s bookings plunged 39%, and its revenue fell 9%. That slowdown partly offset Shopee’s 18% growth in gross merchandise volume (GMV) and 42% revenue growth. Garena’s slowdown forced Sea to aggressively cut costs over the past year since it previously subsidized the expansion of its unprofitable Shopee and SeaMoney divisions with Free Fire’s profits.

Analysts expect Sea’s revenue to rise less than 4% in 2023, but they also expect it to turn profitable for the first time since its IPO. Yet reining in its spending could narrow Shopee’s moat by reducing its promotions and subsidies while delaying Garena’s development of new games to succeed Free Fire. Sea’s stock might seem cheap at less than 2 times this year’s sales, but its high-growth days are likely over, and both of its core businesses could face existential challenges.

Grab’s near-term prospects look brighter

In 2021, Grab’s first year as a public company, its revenue rose 44% as its GMV grew 29%. In 2022, its revenue and GMV grew another 112% and 24%, respectively.

That growth was driven by the robust growth of both its mobility and delivery segments, which grew their GMV by 47% and 15%, respectively, for the full year. Its financial services GMV also rose 27% as it expanded its online lending business.

For 2023, Grab expects its revenue to rise 54% to 61%. It’s still deeply unprofitable because it relies heavily on loss-leading incentives to gain new businesses and consumers, but it’s been reducing those incentives throughout the first half of the year. As a result, it expects to narrow its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss from $793 million in 2022 to just $30 to $40 million in 2023.

Just like Uber, economies of scale are finally kicking in at Grab, which consistently dominates the mobility and food delivery markets across Southeast Asia with its 35 million monthly transacting users (MTUs). And unlike Sea, Grab’s more disciplined spending doesn’t coincide with a significant slowdown in its sales growth. But looking ahead, Grab might face new regulatory headwinds in Singapore, where the Land Transport Authority (LTA) recently launched a review of the ride-hailing industry.

At 6 times this year’s sales, Grab’s stock might seem a bit pricier than Sea’s. Yet that price-to-sales ratio seems reasonable relative to its growth rates, and it doesn’t face as many competitive challenges as the e-commerce and gaming leader.

The better buy: Grab

I once considered Sea to be a top long-term play on the economic growth of Southeast Asia, but Shopee and Garena’s recent troubles are forcing me to reconsider that thesis.

Meanwhile, Grab might face some near-term regulatory challenges, but it’s proven that it has plenty of staying power and remains far ahead of its closest mobility and delivery competitors. Its robust revenue growth and narrowing losses also make it a more promising investment than Sea — which desperately needs to find fresh ways to grow its sales again.

10 stocks we like better than Sea Limited
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now… and Sea Limited wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of September 11, 2023

Leo Sun has positions in Sea Limited. The Motley Fool has positions in and recommends Grab, Sea Limited, and Uber Technologies. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Read More

Leave a Reply

Your email address will not be published. Required fields are marked *