Sea Limited: The Worst Is Over As Signs Of Stabilization Emerge

Summary

Shopee ASEAN and Taiwan saw meaningful improvement in adjusted EBITDA loss due to improved unit economics and is on track to achieve break-even by end 2022.

Shopee Brazil continues to see strong momentum in terms of monthly active users, downloads and time spent, and unit economics improved as order growth continued.

Garena remains focused on user engagement of Free Fire, which is showing signs of stabilization as the weekly revenues for Free Fire may have bottomed in April.

My target price for Sea is $173, implying an upside of 116%.

iPhone 7 showing its screen with Shopee, Lazada and other online shopping application icon.

Sea Limited (NYSE:NYSE:SE) recently reported its 1Q22 and while the company has taken a beating, this set of results suggest that the worst may be over. We are starting to see early signs of stabilization in the gaming business, while there are green shoots appearing in SeaMoney and Shopee Brazil. More on my analysis of the recent quarter below.

Investment Thesis

I have written elaborate articles on Sea both as an initiation article as well as follow up articles (here and here) as the market moves. With everything that is happening at Sea, my initial investment thesis for Sea still stands.

1. Garena will continue to be a market leader and serve as a cash cow for Sea, along with solid growth from not just Free Fire but also other budding new developments from its many gaming studios.

2. Undoubtedly, Sea's Shopee has the leadership position in Southeast Asia e-commerce. It is currently still in the early days in Southeast Asia for Shopee and it is likely to see strong growth in the future from increasing penetration in the region brought about by multiple tailwinds.

3. Sea's market expansion strategy has shown very strong discipline, with a focus on Latin America (LatAm) e-commerce market, which brings exposure to an underpenetrated, fast-growing market. It is also newer and testing waters in some newer geographies in Europe for example.

4. Sea's new emerging fintech business, SeaMoney, will bring additional high growth areas with strong digital payments tailwinds.

E-Commerce On Track And Improving Profitability

As I have highlighted in my previous articles, with the exit from markets like India and France, I expected that this means management is prioritizing markets in which it expects better profitability and lower cash burn. This was what was evident in Shopee's 1Q22 results when the adjusted EBITDA loss of -$743 million was meaningfully lower than expectations of about -$950 million.

While the GMV of $17.5 billion which grew 39% year on year was as expected, the better-than-expected EBITDA loss was attributed to improvement in unit economics, which is shown in its expansion of its take rate which increased from 6.8% in 4Q21 to 7.3% in 1Q22. Another reason was the lower loss per order, especially so for ASEAN and Taiwan markets. In these markets, the adjusted EBITDA loss per order came in at just 4 cents in 1Q22, compared to the 12 cents in 1Q21 and 15 cents in 4Q21. It is also worth noting that the loss per order figure also improved in Brazil to $1.52 in 1Q22 compared to $2.0 in 4Q21.

Therefore, I think that we are on track to seeing Shopee ASEAN and Taiwan achieve its adjusted EBITDA breakeven target this year as the unit economics have become rather favorable in these markets, as shown by the improving profitability this quarter. Furthermore, as shown below, despite the recent listing of GoTo in Indonesia, interest in Shopee remains robust while competitors like Tokopedia and Lazada are seeing waning interest, as evident by the Google search trends.