Sea Limited’s (NYSE: SE) share price has fallen from a YTD high of $88.07 just before its 1Q23 earnings to $57.50 just before its 2Q23 earnings.
When the 2Q23 earnings was released, Sea’s share price plunged by more than 17% to $47.
The stock closed off the trading day at $40.58, a whooping -29% drop!
In my previous article on Sea’s 1Q23 earnings, I mentioned:
“Sea’s pivot to focus on sustainable growth, efficiency and profitability has shown in its bottom line, maintaining positive net income for the second quarter in a row.
Turning profitable was the first step, Sea now has to deliver on stronger sustainable growth and higher profits. More importantly, with the Digital Entertainment segment handicapping the overall performance, Sea has to fix this segment to keep its flywheel of Garena, Shopee and SeaMoney going.”
Alas, 2Q23’s results reflected slowing growth in its e-commerce and digital financial services segment, likely as a result of its cost cutting measures. In the meantime, its digital entertainment segment may have finally bottomed.
Let’s take a look at Sea’s latest 2Q23 performance to figure why the market decided dump $SE and why I think now could be the time to take up a position:
Sea’s 2Q23 financial results summary
| P&L in US’m | Jun’23 | Mar’23 | Dec’22 | Sept’22 | Jun’22 | Variance (%) | Variance (%) |
| EPS in US’$ | 2Q23 | 1Q23 | 4Q22 | 3Q22 | 2Q22 | 2Q23 vs 1Q23 | 2Q23 vs 2Q22 |
| Digital Entertainment revenue | 529 | 540 | 949 | 893 | 900 | -2% | -41% |
| E-commerce and other services revenue | 2,322 | 2,260 | 2,231 | 1,977 | 1,756 | 3% | 32% |
| Sales of goods | 244 | 242 | 272 | 286 | 287 | 1% | -15% |
| Total revenue | 3,095 | 3,042 | 3,452 | 3,156 | 2,943 | 2% | 5% |
| Net income/(loss) | 331 | 87 | 423 | (569) | (931) | 280% | N.M. |
| EPS/(Loss per share) | 0.57 | 0.16 | 0.77 | (1.01) | (1.68) | 256% | N.M. |
| Adjusted EBITDA for Digital entertainment | 239 | 230 | 258 | 290 | 334 | 4% | -28% |
| Adjusted EBITDA for E-commerce | 150 | 208 | 196 | (496) | (648) | -28% | N.M. |
| Adjusted EBITDA for Digital financial services | 137 | 99 | 76 | (68) | (112) | 38% | N.M. |
| Adjusted EBITDA for Other services | (7) | (22) | (25) | (77) | (73) | 132% | N.M. |
In 2Q23, Sea’s total revenues increased by 2% on a QoQ basis as the Digital Entertainment segment finally stemmed its bleeding with a mere 2% decline. The e-commerce segment propped up total revenues with a 3% increase.
Net income increased QoQ from $87 million to $331 million.
Adjusted EBITDA was a notch higher at $510 million in 2Q23 as compared to $507 million in 1Q23.
This also marks the third quarter which Sea has been profitable.
Looking at the year on year performance, total revenue grew a mere 5% as the Digital Entertainment segment recorded a 41% decrease in revenue while the e-commerce segment recorded a 32% increase.
5 Takeaways You Should Note from Sea’s 2Q23 Earnings
1) Slowing E-commerce revenue growth and QoQ EBITDA decline
Market place revenue from e-commerce grew 28% YoY from $1.5 billion to $1.9 billion and was a notch above 1Q23’s revenue of $1.8 billion.
Adjusted EBITDA delivered a strong turnaround YoY, recording an adjusted EBITDA of $150 million, however this was $57 million lower than 1Q23’s Adjusted EBITDA.
The lower Adjusted EBITDA mainly arose from a $72 million decrease in its Asia markets to $204 million while its other markets improved its loss position by $15 million.
Although unit economics continued to improve in Brazil, the focus is on Asia which is its core market.
While Sea highlighted that overall gross orders increased by more than 10% QoQ as a result of increase in active buyers as well as frequency of purchase, we noted that in Alibaba’s recent 1Q24 results, Alibaba reported that its international e-commerce segment grew 41% YoY. In comparison Sea’s e-commerce segment grew 28% YoY.
Lazada and Shopee compete in a duopoly in many key Asian markets and we think Shopee may have lost ground to Lazada as Sea tightened its belt when Alibaba continued substantial investments into Lazada.
2) Sea cannot tighten its belt any further
While accolades have to be given to Sea for turning profit and maintaining profitability for the third quarter, it is clear that Sea has to start investing in its business.
General & Administrative expenses as well as Research & Development expenses continued to decline on a YoY and QoQ basis while sales and marketing expenses went up by $93 million in 2Q23.
This increase in sales and marketing expenses is due to Shopee’s initiative to work closely with influencers and generate more orders. Hopefully this reflects meaningful investments that will yield returns and maintain Shopee’s competitiveness.
Cost of revenue recorded a slight uptick, slightly lesser than the increase in total revenue.
Consequently, gross profits increased to $1.5 billion, compared to $1.1 billion a year earlier and $1.4 billion last quarter.
3) Slowing growth trajectory in Digital Financial services
Revenue for the Digital Financial Services segment increased by $15 million QoQ from $413 million to $428 million. Allowance for credit losses remained stable, decreasing $2 million, from $281 million to $279 million.
This segment was supposed to be the growth segment for Sea and its lacklustre performance could reflect a lack of monetisation and leveraging on the Shopee platform.
4) Is it time to call the bottom for SEA’s Digital Entertainment?
Revenue declined a mere 2% from $540 million to $529 million. Bookings continued declining, down 4% QoQ.
However, quarterly active users increased 11% QoQ, marking a second quarter of increase, Quarterly paying users ratio recovered to 7.9% from 7.7% a quarter earlier.
This means that in the previous quarter, there were 37.9 million paying users while in this quarter there were 43.1 million paying users, a 5.2 million or 13% increase.
However, the continued decline in bookings means that Sea still has a long way to go in turning this segment around. Regardless, the recovery of this segment is worth watching for, to do that.
5) Healthy cash balance
This is the third quarter in a row where Sea has achieved operational cash self-sufficiency with $0.5 billion generated for 1Q23, $0.2 billion more than 1Q23.
If Sea continues to generating operating cashflow, it will not have to worry about its convertible bonds due in 2025 and 2026.
Clearly its time to start investing
Becoming self sustainable was a respectable step in the right direction, Sea now has to deliver growth as well as higher profits.
Sea’s pivot to focus on sustainable growth, efficiency and profitability has allowed the company to maintain positive net income for a third quarter in a row. Cash balances have also strengthened.
However, this may have costed Sea its revenue growth in its e-commerce and digital financial service segment.
CEO Forrest Li commented that Sea has achieved self-sufficiency and demonstrated the profitability of its model. He believes positive development trends are in place and has started to ramp up investments in growing the e-commerce business across Sea’s markets.
To achieve growth, Sea needs to continue its successful monetization of Shopee, with more value-added services, and transaction-based fees. Shopee effectively operates in a duopoly and is already profitable in some of its key markets.
Shopee is also further supported by its fast-growing digital financial services segment which leverages Shopee’s strong existing user base.
As we know, the digital financial services platform is a key aspect of Sea’s flywheel and is in a nascent stage of growth. As it operates in a competitive environment, Sea should invest to ensure this segment continues to a tailwind for Sea’s growth until it eventually reaches a steady state.