Shares of Southeast Asian e-commerce, fintech, and gaming company Sea Limited (NYSE: SE) plunged 43.4% in August, according to data from S&P Global Market Intelligence.
Sea held its second-quarter earnings report toward the middle of the month, and investors did not take too kindly to it.
While Sea beat profit estimates amid its impressive turnaround from large losses last year to profits this year across all three of its businesses, a miss on the top line seemed to cause worry. Moreover, CEO Forrest Li’s comment that Sea would be returning to investment mode in its e-commerce division fed worries the company is feeling competitive pressures, especially from Tik Tok.
In the June quarter, Sea’s revenue grew just 5.2% year over year to $3.1 billion, missing estimates by $150 million. But on the positive side, Sea’s bottom line surprised to the upside with earnings per share according to generally accepted accounting principles (GAAP) of $0.54 beating expectations by $0.08.
On the positive side, each of Sea’s three segments was profitable. This includes Shopee e-commerce, which swung from a huge $726 million operating loss to a $66 million operating profit last quarter, as well as the SeaMoney fintech business, which swung from a $123 million loss to a $122 million operating profit.
However, while the Garena video game segment was the most profitable segment at $296 million, that was down 35% from the prior year, as the post-pandemic reopening and India’s 2022 ban on the hit game Free Fire affected results.
Moreover, CEO Forrest Li told investors on the conference call with analysts that the company would reignite growth investments, which could result in losses:
[T]he economics of our region have remained resilient with inflation largely under control. This further boosts confidence in the long-term growth prospects of our markets. We’re also excited to see recent ecosystem development in diversified user engagement through live streaming and short-form video, as well as affiliate programs, which already brought new growth to Shopee. Such developments in our ecosystem offer us further opportunities to expand our long-term profitable TAM. Given these positive developments and trends, we have started and will continue to ramp up our investments in growing the e-commerce business across our markets. Such investments will have impact on our bottom line and may result in losses for Shopee and our group as a whole in certain periods. However, this does not change our unwavering emphasis on self-sufficiency and improving cost-efficiency as a key competitive moat.
Going back into a lower-profit or even loss-making mode was clearly not what investors wanted to hear, sending shares down in a big way.
Investors are clearly skeptical that Sea’s new spending will result in future profit growth, and some may fear the spending is not offensive but defensive. Of note, privately owned Chinese live streaming giant Tik Tok entered the Southeast Asian region a couple of years ago and has recently eaten into the existing players’ market share with aggressive subsidies.
However, if Sea’s spending does reignite profitable growth for Shopee, the stock seems like a bargain. Shopee rocketed past existing players to take the market-share lead in the region over the past few years, so it knows how to compete.
Also encouraging, while the gaming division’s revenue and bookings continued to fall year over year, the division did see an impressive 11% quarter-over-quarter increase in users and a sequential increase in paying users, perhaps hinting that the division may be stabilizing. Of note, most of Sea’s games are free to play, with users paying for extra features.
In addition, Free Fire just relaunched in India where it was banned over national security concerns in February 2022 after Sea found a local partner to house Indian users’ data. That could contribute to the already-underway recovery in the gaming segment.
If the gaming segment can turn around and Shopee is able to reignite growth, Sea could be a huge bargain. But with both those prospects a big question mark, Mr. Market is on the sidelines for now.
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Billy Duberstein has positions in Sea Limited and has the following options: short January 2024 $30 puts on Sea Limited and short January 2024 $50 puts on Sea Limited. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Sea Limited. The Motley Fool has a disclosure policy.
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