To The Moon

• Sea Ltd $Sea Ltd(SE)$ has soared 95.78% year-to-date.

• However, the current price of $79.29 is still 78% lower than its all-time high of $366.99.

   

2Q2024 Earnings:

The 2Q2024 earnings results are mixed:

• Revenue: +23% YoY, $3.81 billion vs. $3.71 billion expected.

• Earnings per share: 14 cents vs. 18 cents expected, a 22.2% miss.

1) Digital Entertainment: Free Fire Can’t Keep Saving Sea Ltd

• Bookings in the digital entertainment segment grew 21% YoY, mainly driven by Free Fire.

• The digital entertainment segment accounts for nearly 11% of total revenue and contributes 56% of total operating income.

• Garena still aims to relaunch its hit game Free Fire in India after its ban in 2022, but the relaunch date remains uncertain.

• I believe the crucial strategy for Garena should be focusing on launching new hit games rather than continuing to milk the 7-year-old Free Fire. Gamers will eventually grow tired of playing it.

• The digital entertainment segment once reached $859 million in operating income in 4Q2021 but has fallen to $210 million in 2Q2024.

• Over the last few years, Sea Ltd has been unable to recover the lost operating income in digital entertainment from its other business segments (E-commerce and Digital Financial Services). The combined operating income from these other segments was merely $67 million in 2Q2024.

 2) E-commerce: Exciting Top Lines but Poor Bottom Lines

• Management increased Shopee's forecast for gross merchandise volume for the year to mid-20% growth, up from the initial target of the high teens. Sea Ltd also expects Shopee to become adjusted EBITDA-positive from the third quarter.

• Shopee remains focused on Southeast Asia. Its lack of overseas expansion may cause some growth investors to prefer other aggressive listed e-commerce players like Alibaba (Lazada/AliExpress) and PDD (Temu).

• Despite a 33% YoY increase in e-commerce revenue, accounting for 74% of total revenue, the e-commerce segment suffered an operating loss of $84 million in 2Q2024, down from an operating income of $65 million in 2Q2023.

• The e-commerce take rate increased to 12.1% in 2Q2024 from 11.7% in 1Q2024. It’s encouraging that Shopee has the confidence to keep raising its take rate without fearing a loss of merchants and advertisers.

• The operating income for e-commerce has fluctuated between losses and gains over the past few years, making it difficult for analysts to value the business.

3) Digital Financial Services: Growing Momentum

• SeaMoney has continued its strong momentum in growing its loan book and profit while remaining prudent in risk management.

• This segment currently accounts for 11% of total revenue and 40% of total operating income.

• However, investors initially favored Sea Ltd for its gaming and e-commerce businesses. There are many other listed fintech players that may be more appealing than SeaMoney.

Conclusion:

• I remain neutral on Sea Ltd.

• I believe Sea Ltd is more suited for short-term trading rather than long-term investment.

• E-commerce accounts for 74% of total revenue but fails to generate consistent operating income. Intense competition from TikTok, Temu, Shein, and Lazada further adds to the uncertainty of Shopee’s long-term profitability.

• I don't have high hopes for its Digital Entertainment (Garena) business, as it has not yet launched another hit game like Free Fire.

• Bloomberg analysts’ consensus gives Sea Ltd a 12-month target price of $83.67, representing an upside of 5.5% relative to yesterday’s closing price of $79.29.

Source: Bloomberg, 16 Aug 2024