Sea Limited plunged 22% after swinging back to losses. Is the worst over?

What happened?

Sea Limited released its third quarter 2023 (3Q 2023) earnings this week.

The e-commerce cum gaming player’s shares proceeded to plunge 22% to close at US$35.87 on 14 November.

Year-to-date, shares of Sea Limited are down more than 32% and are trading close to its 52-week low of US$34.87.

In the previous quarter, Sea Limited also saw its share price taking a hit after the company warned that investments into Shopee may lead to losses down the road. 

Investors may be wondering if the worst might be over for Sea Limited. 

We dive deeper into the company’s numbers and operating statistics to try to determine this.

What investors may not like about Sea Limited’s earnings

#1 – Incurred a net loss after three consecutive quarters of profitability

For 3Q 2023, Sea Limited saw total revenue inch up 4.9% year on year to US$3.3 billion.

Gross profit climbed by 17.4% year on year to US$1.4 billion as the cost of sales dipped by 3.1% year on year.

Despite this, sales and marketing expenses rose 12.4% year on year to US$918 million, driven by a nearly 50% year-on-year increase in marketing spend for Shopee, Sea Limited’s e-commerce division.

As a result, Sea Limited reported an operating loss of US$127.7 million and a net loss of US$144 million for 3Q 2023.

Sea Limited’s loss per share of US$0.26 was more than double the US$0.12 that analysts had projected.

It was also a sharp about-turn after the company reported three consecutive quarters of profitability.

1Q and 2Q of 2023 turned up a net profit of US$87.3 million and US$331 million, respectively, while 4Q 2022 saw the company serve up a net profit of US$422.8 million.

#2 – The continued fall in quarterly paying users

Sea Limited’s digital entertainment division, Garena, is the company’s cash cow and has always reported an operating profit.

However, 3Q 2023 operating metrics show weakness not just in the division’s quarterly active users (QAU), but also in its quarterly paying users (QPU).

QAU dipped by 4.2% year on year to 544.1 million and was also slightly lower than 2Q 2023’s 544.5 million.

The QPU ratio dropped from 9.1% in 3Q 2022 to just 7.5% in 3Q 2023, the lowest in the past five quarters.

Multiplying the QPU ratio with the QAU, we get a 21.1% year-on-year decline in QPU as the number of paying customers falls from 51.7 million in 3Q 2022 to 40.8 million in 3Q 2023. 

Digital entertainment bookings also plunged by 32.6% year on year to US$447.9 million.

These lower numbers are showing up in Sea Limited’s financials.

The digital entertainment division suffered a 33.7% year on year fall in revenue for 3Q 2023 to US$592.1 million.

Its operating profit fell by 24.3% year on year to US$345.8 million for the quarter.

What investors may like about Sea Limited’s earnings

It is not all bad news for Sea Limited, though.

Let us look at some of the bright spots within the company’s earnings announcements.

#1 – Shopee registered year-on-year growth

Sea Limited’s increased spending seems to have paid off as Shopee reported encouraging numbers.

For 3Q 2023, gross orders increased by 13% year on year to 2.2 billion while gross merchandise value edged up 5% year on year to US$20.1 billion.

Shopee’s marketplace revenue improved by 18% year on year to US$1.9 billion.

Although the division reported an operating loss of US$428.2 million for 3Q 2023, this was slightly lower than the operating loss of US$586.1 million incurred in the prior year.

#2 – SeaMoney reported a strong set of numbers

Sea Limited’s SeaMoney, the up-and-coming digital financial services division, reported strong growth for 3Q 2023.

Revenue for the division surged by 37% year on year to US$446.2 million for 3Q 2023, with gross loans increasing by 5.3% quarter-on-quarter to US$2.4 billion.

SeaMoney’s non-performing loans ratio also improved to 1.6% and is lower than 2Q 2023’s 2%.

The division also generated an operating profit of US$150.5 million for the quarter, reversing the US$82.5 million operating loss in the prior year.

#3 – Garena’s Free Fire India was launched

Meanwhile, Garena has relaunched one of its most popular games, Free Fire, in India at the end of August.

This version, tweaked for the Indian market, is called “Free Fire India” and addresses data privacy concerns brought up by the government.

This title was banned in February 2022 and led to the start of a decline in QAU and QPU for the digital entertainment division.

Before the ban, Free Fire had 40 million monthly active users in India, a significant number which made up half of Sea Limited’s global active user base at the time.

Hopefully, the company can see Garena’s numbers improve sharply in 4Q 2023 and beyond with the re-inclusion of the game in India.

What would Beansprout do?

Sea Limited presented a mixed bag of results for investors.

Its e-commerce and digital financial services divisions are displaying healthy growth but digital entertainment’s weakness threatens to offset this good performance.

In addition, it appears that CEO Forrest Li intends to continue investing in the business to grow its competitive edge and increase market share to fend off rivals such as GoTo and TikTok.

Three consecutive quarters of profitability have boosted Sea Limited’s coffers, with total cash and investments hitting US$7.9 billion as of 3Q 2023.

The company’s focus will be on building its e-commerce content ecosystem, especially in live streaming, implying that this will entail more spending down the road.

For now, Wall Street analysts remain positive on Sea Limited, with close to 72% of analysts having a buy or strong buy rating on the stock as of 15 November 2023

The average share price target is US$65.19, a whopping 82% above its current share price. In fact, the lowest share price target of US$39 would also represent a premium to its current share price. 

We will be monitoring the performance of Garena and Shopee in the coming quarters to determine if Sea’s share price has really hit rock bottom. 

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