To The Moon

This is a follow-up from my post yesterday on my expectations on $Sea Ltd(SE)$'s earnings before its second-quarter earnings announcement.

Unfortunately, the company has under-performed even the already low bar set by analysts and its share price sank almost 14% as a punishment by the unforgiving market.

This is not unexpected, as the download data from Google Play and App Store appeared to show that SEA’s gaming and e-commerce popularities have further deteriorated from the first quarter.

In fact, the company had expected in March that Garena would post $2.9 billion to $3.1 billion in bookings in 2022, set to be its first decline ever.

My key takeaways from the earnings report are as follows:

· Its digital entertainment unit Garena continues to be the breadwinner and saving grace for the company, though revenue from the gaming business fell to $900.3 million in the last quarter, only slightly ahead of estimates for $827.6 million, as its hit mobile game Free Fire matures. It seems to me that Garena has been experiencing strong headwinds, as the reopening of global economies and lifting of border restrictions for travels competed for the attention of its users.

· Quarterly active users of Garena were down 15% year over year, while the number of paying users dropped even more drastically by 39%.

· While its e-commerce unit Shopee and digital financial services arm Sea Money continue to grow fast, they remain highly unprofitable, as SEA appears to prioritize market expansion over profitability and continues to invest heavily to gain market share globally at the expense of profits. As a result, Garena has to continue to subsidize the expansion costs of Shopee and Sea Money.

· Second-quarter revenue from Shopee, gained 51% to about $1.7 billion versus forecast of $1.9 billion, while that from Sea Money rose to $279 million.

· Total gross profits last quarter were $1.1 billion, down from $1.2 billion last quarter.

· However, SEA suffered a net loss of $931.2 million that has not only widened but more than doubled from $433.7 million in the prior-year quarter.

· The last straw was its removal of full-year revenue guidance for its e-commerce business, when it had previously guided 71.8% growth, citing an ever-changing macro environment. That does not instill any confidence in investors.

I expect much more strong headwinds ahead for SEA with increasing regulatory tightening on gaming and rising cut-throat competitions in e-commerce. With expectation by Monetary Authority of Singapore on SEA to launch its local digital bank this year after awarding digital full banking license to SEA in a move to liberalize the local financial industry, SEA is anticipated to incur more significant start-up costs and faces intense competitions from the local banking incumbents the likes of DBS, OCBC and UOB, as well as other digital banks including the formidable Grab-Singtel consortium.

I hold a small stake in SEA, and regret not taking money off the table when its share price more than doubled, as I now sit on paper loss. While time in the market is more important than timing the market, I believe that SEA has to reinvent itself and contain its costs to stay relevant and formidable. Garena has to develop and come up with new mobile hit games the likes of Free Fire to retain existing users and attract new users. SEA needs to also focus on reducing costs by slowing its expansion and turn its attention to gaining profitability by differentiating itself against increasing competition from other e-commerce and digital financial service providers.

Hopefully, SEA will be able to reassure the market by focusing on and demonstrating profitability, so that I can be rewarded for staying through thick and thin with the company for the long-haul.

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