Sea Earnings –Coming out Swinging or Sinking? [Earnings Season]

Sea Limited, $Sea Ltd(SE)$ the global consumer internet company founded in Singapore reports earnings before market open on May 17. Consensus estimates for Q1 2022 are:

• Earnings Per Share of -$1.06 vs -$0.620 (-71.0% Year-on-Year, YoY)
• Total GAAP Revenue of $2.8 billion vs $1.76 billion (+58.8% YoY)

SE operates three core businesses:

• Shopee, the largest mobile-centric E-Commerce (EC) platform in Southeast Asia and Taiwan, offers online shopping with integrated payment, sellers’ virtual shopfront and fulfilment services. It has also gained a strong foothold in selected Latin America countries, but have exited India and France markets.
• Garena, one of the largest Digital Entertainment (DE) platform provides PC and mobile online games, access to entertainment content, and eSports services in over 130 countries. Its Free Fire title is the most downloaded mobile game globally for three years running, from 2019 to 2021.
• SeaMoney is an up and coming Digital Financial Services (DFS) provider in Southeast Asia for individuals and businesses. It provides mobile wallet, payment services—AirPay, Spay Later, ShopeePay, and payment processing services. Together with partners, it has secured licence to operate in Singapore, Malaysia and Brazil, and look to expand to more countries.

Sea Fundamentals

We start by reviewing some SE key financials for FY2021, to gain insight into how Q1 2022 and the year might shape up going forward.

Revenue

Total revenue grow is impressive at +128% YoY to $9.9552 billion, with Shopee (EC) having the largest share at $5.123 billion, followed by Garena (DE) $4.320 billion and SeaMoney (DFS) at $0.4698 billion. The fastest growth is in DFS +711% and will likely to be the key growth driver going forward. What is worrying for the future is DE, slowing to just single digit +7% revenue growth.

source: SE financial report

Adjusted EBITDA and Cost of Revenue

The only positive Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) among SE three core business is Garena (DE) at $2.776 billion. This however is more than swallowed up by negatives in EC with -$2.554.2 billion and DFS at -$0.616.9 billion.

source: SE financial report

SE has been working hard to achieve profitability for its Shopee (EC) business. These has included exiting highly competitive and costly markets such as India and France (analyst estimates this would save SE cash-burn by $60 million per quarter) and focus on South East Asia and Taiwan markets where it has leading market share, and gained traction in Latin America countries such as Brazil.

If SE could not control or lower its cost of generating revenue and its high sales & marketing expenses, reaching $1.2199 bil, it might find it hard to be profitable.

As an example, besides incentives such as free shipping to coins cashback in its EC business, it has spent handsomely on marketing to gain awareness and mindshare, by securing celebrities from football superstar Ronaldo to Hollywood & HK star Jackie Chan to appear in Shopee ads, and K-pop icon BTS to be its Free Fire brand ambassadors.

Jackie Chan appearing in Shopee Ad

Investors would be scrutinising the upcoming Q1 2022 key financial figures to see if the trend is in line with its 2022 guidance or it’s worsening. While some have exited early anticipating poor results, and possibly caused the -$5.07 (-6.72%) drop in share price to $70.33 on May 16 close, others might sell their holdings on actual results that are below expectation.

Technicals at Sea

After a massive run up from May 2020 to Oct 2021, fuelled by unprecedented demand for online shopping and gaming due to work and stay-at-home economy during the COVID-19 pandemic, SE price has cratered -81.13% from all-time-high (ATH) of $372.70 to now trading around $70.33 at May 16 close (see chart below).

Weekly Chart of SE

It gave up almost all of its stock price gain during the period in just a few months since ATH, on the back of softening discretionary online shopping and gaming demand due to high inflation and back to work and school reopening. More critically, the sell-off was due to investors moving their investment out of high growth, richly valued but yet to be profitable companies such as SE, in anticipation of rising interest rates environment to combat inflation.

Shopee and Garena exit from India did not impact its share price significantly. The ban of its Free Fire game in India while initially caused a drop of -18.39% in share price on Feb 14 2022, it recovered most of it the next day, up +15.78%. Shopee exiting the challenging and competitive e-commerce market of India (and also France) was actually positive for SE, as analysts viewed it as saving on cash-burn, and would help it achieve profitability faster in its e-commerce (EC) business. SE stock was up +8.87% the day after announcing exit from India on Mar 28 2022.

Based on chart structures of SE, price might find stronger support in the zone of $54 to $36.62 (recent fair value estimate for SE stock) while overhead resistance is based on shorter term, daily moving averages trendlines at $81.35 to $99.97 or round up $100.

These price zones would provide the context of how much price in shorter term could swing up or sink further, especially around earnings where bigger movements are expected.

Zooming in on Daily chart of SE would help us identify possible price movements post earnings and target entry and exit prices.

Daily chart of SE

If earnings beat expectations and positive forward guidance, price might swing higher to meet 20-day moving average (MA 20) around $81.35 (+18.07%). Price might catapult even higher to reach MA 50, around $99.97 (+42.91%), if there are catalysts that are extremely bullish for the company business.

If earnings miss and poor forward guidance, or just in-line with expectation for earnings and guidance, it might not satisfy investors and further selling could see the stock sinks to $54 (-23.22%), or dives deeper to recent fair-value around $36.45 (-48.17%).

Swinging Up or Sinking Further?

Given the volatile price action of SE stock in recent months, it might be more prudent to wait for price direction-whether swinging higher or sinking further-to be established post-earnings, before entering new positions in SE, to avoid trading against the prevailing trend.