Is Sea Ltd. Profitability Sustainable?

Overview:

Sea Ltd. $Sea Ltd(SE)$  , the parent company of Shopee, announced on Tuesday its first-quarter results ending March 31. The company incurred a net loss of $23 million due to a nearly 50% increase in costs, a significant downturn from the $87.3 million profit reported in the same period last year. Adjusted earnings per share stood at -$0.04, surpassing analysts' estimated -$0.02.

E-commerce Segment: Shopee Shines Amidst Challenges

In the first quarter, Sea Ltd. witnessed a 23% year-on-year increase in revenue to $3.73 billion, exceeding analysts' expectations of $3.56 billion. Shopee, the company's e-commerce arm, experienced a 33% growth in revenue to $2.7 billion, surpassing analysts' projections of $2.54 billion. Shopee's Gross Merchandise Volume (GMV) grew by 36% to $23.6 billion, also surpassing analyst expectations.

Gaming Segment: Garena Sees Profit Surge

Sea Ltd.'s gaming subsidiary, Garena, known for its popular game "Garena Free Fire," reported a 27% increase in adjusted operating profit to $292 million, attributed to a rise in paying users and reduced costs. Despite efforts to launch new games, Garena's revenue declined by 15% to $458 million.

Outlook and Insights:

Market analysis suggests that despite high marketing costs, Sea Ltd.'s adjusted operating profit is expected to continue growing due to its dominant position in Southeast Asian e-commerce and a robust user ecosystem. The company's scale advantage may help it fend off competition from TikTok, the upcoming Shein, and Temu under Pinduoduo in the region's e-commerce sector.

Looking ahead, Sea Ltd. aims to achieve profitability for the second consecutive year, driven by cost-cutting measures, including layoffs, marking its first annual profit since its 2017 IPO. Founder Li Xiaodong emphasizes strengthening the company's livestreaming business to counter intensifying competition, albeit acknowledging potential profit margin pressures amidst competition with TikTok.

In a memo to employees on Tuesday, Li Xiaodong stated, "We have a clear roadmap for profit growth this year. Strong performance in the first quarter has set a solid foundation for us."

@CSing How do you think about the future of Shopee?