Analysis

Why Sea Limited Stock Plunged This Week

Shares of Sea Limited (SE -1.53%) were taking a dive this week after the diversified Southeast Asian tech company posted disappointing results in its third-quarter earnings report. Sea, which operates as an online gaming, e-commerce, and digital payments company, posted a surprise loss in the quarter, adding to concerns about a lack of financial discipline.

Through Thursday’s market close, the stock was down 16.7% for the week.

Image source: Getty Images.

Sea sinks deeper

Like other fast-growing tech stocks, Sea was a big winner during the pandemic, but since then, the stock has come crashing down as growth has slowed and losses have persisted, and the third quarter did little to change that narrative.

Revenue in the quarter grew 4.9% to $3.31 billion, which topped estimates of $3.11 billion. Sales from its Shopee e-commerce division rose 16.2% to $2.2 billion, and revenue from its SeaMoney financial services business jumped 36.5% to $446.2 million. However, Garena, its digital gaming segment, remained weak with revenue down 33.7% to $592.2 million, which management blamed on a moderation in user engagement and monetization. Revenue from the popular Free Fire peaked in December 2021 as the gaming market is highly dependent on blockbuster titles.

Sea also delivered an improvement on the bottom line as it narrowed its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss in e-commerce and swung to an EBITDA profit at SeaMoney thanks to improvements in credit losses and an increase in its loan book. Overall, adjusted EBITDA came in at $35.3 million, which compared to a loss of $357.7 million in the year-ago quarter.

However, on a generally accepted accounting principles (GAAP) basis, the company reported a loss per share of $0.26, which was much worse than the consensus of a per-share profit of $0.03.

Sea did not provide guidance, but comments from CEO Forrest Li in the press release seemed to indicate that profitability was not around the corner as he said, “In this current period, we will prioritize investing in the business to increase our market share and further strengthen our market leadership. ” Pursuing market share will likely come at a cost to profitability.

What’s next for Sea Limited?

Investors have already been doubting the strategy around Shopee, which lost $346.5 million in adjusted EBITDA in the quarter. Notably, Shopee’s loss expanded in Asia, Sea’s core market, which seems like a troubling sign. The company has been focused on expanding in Brazil and narrowed its losses there, but the company is facing stiff competition from MercadoLibre and Amazon in that market.

At this point, investors have made it clear that they need to see profitability from Sea in order for the stock to go higher. The focus on market share gains, especially with revenue growing by just single digits, could end up pushing the stock even further down.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon, MercadoLibre, and Sea Limited. The Motley Fool has positions in and recommends Amazon, MercadoLibre, and Sea Limited. The Motley Fool has a disclosure policy.

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