To The Moon

$Sea Ltd(SE)$, a leading internet platform provider in Southeast Asia, has reported its first quarterly profit on 7 March, and its stock has surged more than 23% to a high of 81.75. While this news may seem impressive, there are several reasons why I am planning to short Sea Limited's stock.

SE day chart

Why Sea Limited is Soaring After Reporting Earnings

Sea Limited's stock price jumped significantly after the company reported its first-ever quarterly profit. The company's Q4 2022 results beat expectations, with revenue increasing 45% year-over-year to $4.7 billion and gross profit increasing 55% year-over-year to $1.2 billion. The company's gaming segment, Garena, was the primary driver of growth, with revenue increasing 73% year-over-year to $3.3 billion.

Additionally, SE's management provided strong guidance for 2023, with expectations of continued growth across all business segments. These positive results and guidance have led to increased investor optimism and a surge in demand for the company's stock.

Sea Limited's Profitable Quarter Might Not Be That Fantastic

Despite Sea Limited's profitable quarter, there are concerns about the company's overall financial health. While Sea Limited's revenue growth has been strong, its expenses have been rising even faster. This means that the company's profitability may not be sustainable in the long run. Sea Limited's profitable quarter was uplifted by $130 million in "accruals reversal," which was likely a result of the company's cost-cutting efforts. This means that the reported profit may not be entirely due to the company's core business operations, but rather a result of financial accounting adjustments.

Excluding the $130 million item, Sea Limited's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) would have been $365.7 million, resulting in a margin of 10.6%. This adjustment is significant, as it suggests that the company's profitability is not as strong as it may initially appear.

Market Sentiment Not Good

Additionally, market sentiment is not good after Fed Chair Powell announced that interest rates are "likely to be higher" than previously anticipated. This news has caused many investors to re-evaluate their positions, leading to a general sell-off in the market.

The Stock Soars, but Such a Rally Usually Won’t Last

While Sea Limited's stock has soared in response to its profitable quarter, it's important to remember that such a rally usually won't last. The stock has already hit a high of 81.75, and it's unlikely that it will continue to climb at the same rate. In fact, short interest in the stock jumped following the rally.

Planning to Sell Naked Out-of-the-Money Call Options

Given the above concerns, I plan to short Sea Limited by selling naked out of the money call options at a strike price of $81 (near its recent high), expiring two weeks from now. The call $SE%2020230324%2081.0%20CALL$ $SE 20230324 81.0 CALL$  is currently priced at $1.89, and there is still a small tidy profit to meet. I am expecting this option to expire worthless, as I believe that the stock price will not increase significantly over the next two weeks with the factors mentioned above.

What Is Naked Call Option Selling and What to Consider

Naked call option selling is a strategy in which an investor sells a call option on a stock they do not own. The seller receives a premium in exchange for giving the buyer the right to buy the stock at a predetermined price (the strike price) at or before the option's expiration date. The strategy is profitable if the stock price remains below the strike price until the option expires.

However, naked call option selling is a risky strategy, as the seller could face unlimited losses if the stock price increases significantly. It is crucial to consider the potential downside and have a solid risk management strategy in place when selling naked call options. In this case, I am confident that the stock price will not rise significantly over the next two weeks, and I have set a stop-loss order to limit my potential losses in case the stock price does rise unexpectedly.

Conclusion

In conclusion, Sea Limited's profitable quarter may not be as impressive as it seems, and the company's overall financial health may be in question. Additionally, market sentiment is not good, and it's unlikely that the stock's rally will continue. By selling naked out-of-the-money call options, I am taking advantage of these concerns to potentially profit from a decline in Sea Limited's stock price.