Sea tumbles by 14%. Is the worst over?

What happened?

Just when we thought the worst of the correction is over for tech stocks, the earnings for Sea Limited brought another set of surprises. 

Southeast Asia’s tech darling fell 14% after it reported its second quarter results, bringing Sea’s share price back to below US$80.

While the revenue and earnings appeared to be meet investor expectations, many were disappointed by the removal of guidance provided for its e-commerce business. 

Let’s take a deeper look at the results.

What we learnt from Sea Limited 2Q22 results

#1 – E-commerce losses continue

Sea’s e-commerce business, known more widely as Shopee, reported an adjusted EBITDA loss of US$648 million in 2Q22. 

This was slightly lower than losses of US$743 million in 1Q22, and losses of US$877 million in 4Q21. 

Clearly, management of Sea has been trying to improve on the profitability of the e-commerce segment. 

This was also echoed by the management of Sea, who shared that its adjusted EBITDA losses pre-HQ costs continued to trend down compared to the previous quarter in its core markets of Southeast Asia and Taiwan, as well as in Brazil. 

Shopee continued to see healthy metrics on its operational performance, with gross merchandise value growing at 10% compared to the previous quarter, and its take-rate improving to 7.7%.  

#2 – Suspension of E-commerce guidance concerning

If Shopee’s performance appears to be meeting market expectations, what is causing investors to worry?

The disappointment came through for the suspension of guidance given for its e-commerce business this year. 

Previously, the company had expected revenue in 2022 to be US$8.5 billion to US$ 9.1 billion. At the midpoint of this guidance, it would represent a 72% growth compared to 2021. 

Naturally, there were a lot of questions asked during the results conference call about why the guidance was removed. 

Management explained that this was due to the “high volatile and unpredictable macro environment”. 

As such, the Sea will be prioritizing “efficiency and self-sufficiency”. What this means is that the company may not want to be over-committing to its announced guidance.

Management also made it clear they do not see the market as deteriorating or that they see anything that is significantly negative. Their long-term view about the market has also not changed. 

“The target now is going to be increasingly efficiency improvements and long-term health and strength and profitability of the platform.” – Wang Yanjun, Chief Corporate Officer, Sea

#3 – Gaming business weaker as expected 

As expected, Sea’s gaming business Garena reported lower EBITDA of US$334 million in 2Q22 as the pandemic boom continued to fizzle. 

While the quarterly average active users was similar to the previous quarter at 619 million, the number of paying users declined further to 56 million. 

The average revenue per paying user (ARPU) also fell 5% compared to the previous quarter. 

Thankfully, Sea has kept its guidance for the gaming business unchanged. Bookings are expected to be US$2.9 to US$ 3.1 billion this year. 

At the midpoint of the guidance, this would represent a 35% decline compared to the previous year. This is largely due to a moderation in online activities with the post-covid re-opening, as well as Free Fire ban in India. 

What would Beansprout do? 

If there’s something that we’ve learnt from investing, it’s that the market really dislikes uncertainty.

Maybe even more so than missing on earnings or cutting forward guidance. 

This is why it might be hard to see Sea having a significant turnaround in the short term. 

After all, if management finds it difficult to project what will happen in the next few months, it will be even more challenging for analysts and investors to have a crystal ball. 

That said, there are still things to like about Sea. Losses in the e-commerce business are narrowing. The number of active users on Garena are stabilizing. The company remains committed to its long term financial targets. 

We’d like to see more signs of a turnaround in Shopee to determine that Sea is truly out of the choppy waters it’s in currently.