Sea Limited: Another Strong Quarter; Profitability Could Be Turning A Corner

seekingalpha2022-05-31

SummarySea Limited reported a strong start to the year with revenue growing 64% yoy to $2.9 billion, quickly approaching a $15 billion run-rate level.The biggest concern remains around profitability, ...

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Comments

YueShan
2022-05-31
YueShan
Up soon
Ericdao
2022-05-31
Ericdao
Short term can be bullish but I will prefer to wait until its really almost turn profitable. No hurry to enter now
MLFL
2022-05-31
MLFL
Nice 👍
Dollarvan
2022-05-31
Dollarvan
Okay
Zarkness
2022-05-31
Zarkness
Nice
StLiaS
2022-05-31
StLiaS
like

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Despite a challenging macroeconomic environment, the company continues to beat revenue expectations.In addition, while adjusted EBITDA loss widened from the year ago period, it came in better than expectations. The company has a significant amount of increased expenses coming from the new headquarters project in addition to increased S&M and R&D expense. I believe investors will continue to focus on adjusted EBITDA and given the company’s growing scale, I believe profitability will improve over the coming quarters.Data by YChartsThe stock is down over 60% year to date which is largely being driven by investors focusing on higher profitability companies. With fears rising around a potential recession, investors are looking to add recession-proof positions to their portfolio, and unfortunately with over $1.5 billion of adjusted EBITDA losses likely in 2022, Sea does not currently fit into that category.However, I do believe that long-term investors will be rewarded with the stock now under $85. The last time the stock was trading at this level was in May 2020 (aside from a short period a few weeks ago), shortly after the pandemic began and E-Commerce sales significantly accelerated. The stock is still up over 50% from pre-pandemic levels, however 2022 revenue is likely to be up over 4x that of 2019, so some stock appreciation is definitely warranted.The stock is currently trading at just over 2x 2023 revenue, which appears to be a good entry point for longer-term investors. Revenue growth has significant room to go and while losses are still being generated, I would not be surprised to see profitability breakeven during late 2023 or early 2024.The 60%+ year to date pullback provides a good entry point at current valuation and longer-term investors should be willing to hold onto the stock during some volatile periods.Q1 Earnings RecapRevenue during the quarter grew an impressive 64% yoy to $2.9 billion and beat expectations by around $40 million. The company is quickly approaching a $15 billion revenue run-rate and with revenue still growing well above 50%, it’s no surprise many investors follow this name.However, what impressed me the most was the company’s continued focus and improvement on profitability. Especially during a time when investors are turning their focus towards more stable, profitable companies in fear of a potential recession, SE’s ability to demonstrate profitability improvement is paramount to a turnaround in the stock’s performance.Sea LimitedGross profit during the quarter grew 81% yoy to $1.2 billion and reflected a gross margin of 40.4%, improving quite nicely relative to 36.6% in the year ago period. To me, this demonstrates the underlying high incremental margins the company generates when at scale.Adjusted EBITDA, while still bearing the losses from their E-Commerce segment, seems to have stabilized and beat expectations. During the quarter, adjusted EBITDA loss was $510 million and while lower than the $88 million profit in the year ago period, this was well above consensus expectations for a $570 million loss. The biggest variance relative to the year-ago period was ~$525 million increase in S&M and R&D expense, which will be better utilized as the company scales.While I do believe the company will likely print several more quarters of adjusted EBITDA losses, the combination of gross margin improvement and the company gaining more scale gives me increased confidence in the longer-term profitability trajectory.Digital EntertainmentDuring the quarter, Digital Entertainment revenue grew 45% yoy to $1.1 billion and adjusted EBITDA was $431 million.While the headline numbers look strong, I believe there is more fire power to come. Quarterly active users declined 5% yoy and quarterly paying users were down 23% yoy, with management acknowledging a slowdown in user engagement.While Garena experienced headwinds in its growth post-COVID, we saw some preliminary positive effects from our efforts to improve user engagement in Free Fire. In particular, the monthly user trends for Free Fire began to show some early signs of stabilizing toward the end of the first quarter. While this is encouraging, the longer-term impact of reopening around Free Fire remains to be seen and we will continue to focus on user engagement and user base stabilization.Free Fire, the company’s self-developed global game, maintained their premium status throughout the world. While some bearish arguments focus on the company only having one global leading franchise, I believe this is more than enough for investors to remain excited about. Plus, the company continues to spend hundreds of millions of dollars each quarter in R&D, and it would not surprise me to see future game developments.Regarding Free Fire, this game continues to collect accolades throughout the world, with management noting the following:It [Free Fire] remained the most downloaded mobile game globally in the first quarter of 2022, according to data.ai3.In the same category, for Google Play, Free Fire also ranked third globally by average monthly active users in the first quarter of 2022, according to data.ai3Free Fire continued to be the highest grossing mobile game in Southeast Asia and Latin America for the first quarter of 2022, according to data.ai3 . Free Fire has maintained this leading position for the past 11 consecutive quarters in Southeast Asia and in Latin America.In the United States, Free Fire was the highest grossing mobile battle royale game for 5 consecutive quarters for the first quarter of 2022, according to data.ai3Despite the headwinds from lower user engagement, the company did increase their paying user ratio to 10.0% during the quarter, up from 8.9% in Q1-2020. I believe this remains an area of longer-term growth potential, as only 1 in 10 users is actually a paid user. This penetration is not likely to meaningfully accelerate in a short period of time, but if the company can grow users and improve their paying user ratio, this has a compounding effect towards growth.E-CommerceE-Commerce revenue grew 64% yoy to $1.5 billion, including $1.3 billion of marketplace revenue that grew 75% yoy. The strong growth during the quarter was led by a 71% growth in gross orders, reaching 1.9 billion, and GMV growing 39% yoy to $17.4 billion, both demonstrating the strong underlying demand trends within this segment.Sea LimitedNevertheless, the closely followed metric of adjusted EBITDA loss came in at $743 million, which was worse than the $413 million loss in the year ago period. However, there are a few moving pieces within E-Commerce adjusted EBITDA that should be addressed.First, gross profit margin for this segment improved yoy as the company saw faster growth of transaction-based fees and advertising income, which both carry higher profit margins.Second, the E-Commerce adjusted EBITDA loss per order (before the company’s new headquarters’ common expense) improved yoy and sequentially. In fact, Shopee is expected to achieve positive adjusted EBITDA (before headquarters’ expense) in Southeast Asia and Taiwan by this year. Even when including the costs associated with the headquarters, the company is projecting adjusted EBITDA to be positive in Southeast Asia and Taiwan by the end of next year.Finally, adjusted EBITDA loss per order was $0.40 during the quarter, which was slightly worse than the $0.38 loss per order in the year-ago period. However, this was largely due to headquarters expenses increasing by $162 million yoy, accounting for nearly 50% of the total yoy increase in adjusted EBITDA loss. Excluding this expense, adjusted EBITDA loss per order would have improved to a little over $0.30.Yes, there continues to be a lot of room for improvement, but the underlying trends are much better than they appear at face value.Digital Financial ServicesWhile revenue in this segment remains relatively small compared to Digital Entertainment and E-Commerce, revenue of $236 million grew 360% yoy and adjusted EBITDA loss improved to $125 million (compared to a loss of $153 million in the year ago period).The number of quarterly active users grew 78% yoy to 49 million with TPV for their mobile wallet growing 49% to $5.1 billion.In addition, the company noted that active users are starting to utilize multiple products/services, and a higher attach rate could ultimately lead to faster revenue growth and profitability improvement.In Indonesia, which has the most comprehensive set of products and services among our markets, over 30% of the quarterly active users have used multiple SeaMoney products or services in the first quarter of 2022.I believe this segment remains a bit of a hidden gem as revenue has not quite scaled and it still generates adjusted EBITDA losses. However, as more consumers become entrenched in E-Commerce and accustomed to using digital wallets within the SeaMoney ecosystem, I believe there remains a long runway of growth ahead.ValuationGiven continued uncertainty in the global macroenvironment, especially across the Asia-Pacific region, the company provided a wider range of their E-Commerce revenue expectations. They now expect E-Commerce revenue to be $8.5-9.1 billion (~72% growth at the midpoint), which was lowered at the low-end from the previous guidance range of $8.9-9.1 billion.While disappointed with the commentary, it’s important to note that only the low-end of guidance was changed. Given the cautious macroenvironment and challenging supply chain, it’s not overly surprising to see the company provide a wider range of outcomes.The stock remains down over 60% year to date has investors heavily punished the company’s heightened valuation and international exposure in a time where recession fears are rising. The stock is now trading near May 2020 levels, shortly after the pandemic began, though I believe long-term investors should still remain confident.Data by YChartsThe stock has a current market cap of ~$46.3 billion and with net cash of ~8.5 billion, the company has an enterprise value of ~$37.8 billion.According to Yahoo Finance, consensus is expecting ~$18 billion of revenue in 2023, which would imply only ~2.1x 2023 revenue multiple. At the peak, the stock was trading over 10x forward revenue, which seemed a little aggressive given the lack of profitability.However, at just over 2x 2023 revenue, it does appear that a lot of risk is already priced in the stock. While I am not advocating for the stock to re-rate back towards 10x forward revenue, I do believe valuation could improve over time as revenue growth remains healthy and the company takes steps to improve their profitability.Given the significant pullback year to date and positive Q1 results, I believe SE is a good investment at under $85.I believe the biggest risk to the company is macroeconomic factors. If the global economy were to slowdown and consumer spending deteriorates, the company’s E-Commerce and Digital Financial Services segments would be negatively impacted. In addition, if the company is not able to improve user engagement within Digital Entertainment, investors may push the stock lower over time.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":9027384659,"gmtCreate":1653971324471,"gmtModify":1676535371987,"author":{"id":"3583033297199166","authorId":"3583033297199166","name":"YueShan","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":1,"idStr":"3583033297199166","authorIdStr":"3583033297199166"},"htmlText":"Up soon","listText":"Up soon","text":"Up soon","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9027384659","repostId":2239175639,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9027380062,"gmtCreate":1653970195656,"gmtModify":1676535371784,"author":{"id":"3574662162410712","authorId":"3574662162410712","name":"Ericdao","avatar":"https://static.tigerbbs.com/bc892cea22318ad4afece18be23b502b","vip":1,"hat":"https://static.tigerbbs.com/ae1f49570794979e009a5efdeb6f4789","crmLevel":8,"crmLevelSwitch":1,"idStr":"3574662162410712","authorIdStr":"3574662162410712"},"htmlText":"Short term can be bullish but I will prefer to wait until its really almost turn profitable. No hurry to enter now&nbsp;","listText":"Short term can be bullish but I will prefer to wait until its really almost turn profitable. No hurry to enter now&nbsp;","text":"Short term can be bullish but I will prefer to wait until its really almost turn profitable. No hurry to enter now","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9027380062","repostId":2239175639,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9027312583,"gmtCreate":1653969503542,"gmtModify":1676535371718,"author":{"id":"4115684828159522","authorId":"4115684828159522","name":"MLFL","avatar":"https://community-static.tradeup.com/news/1d7ab965a9728265436a2d2a8db471ce","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"4115684828159522","authorIdStr":"4115684828159522"},"htmlText":"Nice 👍&nbsp;","listText":"Nice 👍&nbsp;","text":"Nice 👍","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9027312583","repostId":2239175639,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9027316280,"gmtCreate":1653969411741,"gmtModify":1676535371693,"author":{"id":"3555014251535651","authorId":"3555014251535651","name":"Dollarvan","avatar":"https://static.tigerbbs.com/0316ab12b442ee2cd79936de06de5089","vip":1,"crmLevel":5,"crmLevelSwitch":1,"idStr":"3555014251535651","authorIdStr":"3555014251535651"},"htmlText":"Okay","listText":"Okay","text":"Okay","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9027316280","repostId":2239175639,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9027318605,"gmtCreate":1653969300807,"gmtModify":1676535371664,"author":{"id":"3572916667219493","authorId":"3572916667219493","name":"Zarkness","avatar":"https://static.tigerbbs.com/4b8c61830c4883c4232aece921d89d14","vip":1,"hat":"https://static.tigerbbs.com/b0a2963eb37c60c5d6d4a8dbcd266952","crmLevel":3,"crmLevelSwitch":0,"idStr":"3572916667219493","authorIdStr":"3572916667219493"},"htmlText":"Nice&nbsp;","listText":"Nice&nbsp;","text":"Nice","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9027318605","repostId":2239175639,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9027310287,"gmtCreate":1653968761149,"gmtModify":1676535371554,"author":{"id":"3587035779894315","authorId":"3587035779894315","name":"StLiaS","avatar":"https://static.tigerbbs.com/d128f37c753a5fb3a7b118c38d312807","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3587035779894315","authorIdStr":"3587035779894315"},"htmlText":"like","listText":"like","text":"like","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9027310287","repostId":2239175639,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":312,"commentSize":94,"repostSize":0,"favoriteSize":5,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2239175639"}