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Did Sea Limited Finally Prove the Bears Wrong?

By Leo Sun - May 17, 2018 at 4:21PM

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The Southeast Asian tech company rallies -- but remains below its IPO price.

Shares of Sea Limited (SE) surged 13% on May 16, after the Singaporean tech company posted strong revenue growth during its first quarter. But even after that post-earnings pop, Sea remains about 20% below its IPO price of $15.

Sea's public debut last October was a rocky one, due to concerns about its heavy losses as it diversified beyond video games toward e-commerce and mobile payments. Even the backing of Tencent (TCEHY 2.46%), which owns about 35% of Sea, failed to allay those fears.

View of Times Square news ticker during Sea's IPO.

Image source: Sea Limited.

Does Sea's first quarter finally offer a glimpse of a brighter future? Let's examine the numbers and see if the company can prove the bears wrong.

How fast is Sea growing?

Sea's reported revenue rose 65% year-over-year to $155 million, marking a deceleration from its 73% growth in the fourth quarter. However, its non-GAAP "adjusted" revenue -- which is comparable to gross billings and accounts for changes in deferred revenue -- climbed 81% to $197 million, marking an acceleration from its 73% growth in the fourth quarter.

Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) surged 250% to $145 million, up from 150% growth in the fourth quarter. However, its adjusted net loss widened from $67 million a year ago to $205 million. On a GAAP basis, its net loss widened from $73 million to $216 million.

Sea finished the quarter with $1.17 billion in cash and equivalents, down from $1.35 billion at the end of 2017. Burning through $175 million in cash in a quarter with widening losses is still a red flag, regardless of how robust its adjusted EBITDA growth might seem.

Solid growth in video games

Sea's digital entertainment unit's adjusted revenue grew 43% to $146 million, while its reported revenue rose 26% to $111 million. Its adjusted EBITDA climbed 49% to $55 million. Quarterly active users on its Garena platform -- which offers self-published and licensed games across seven Southeast Asian markets -- rose 125% to 126.7 million.

Garena's portfolio includes popular PC and mobile titles like League of Legends, FIFA Online 3, Point Blank, Blade & Soul, and Arena of Valor. It's also a top organizer of esports events across Southeast Asia.

However, the platform's average revenue per user fell 33% to $1.20. This was mainly caused by the number of its quarterly paying users staying flat sequentially at 7.2 million, which indicates that the freemium model -- with free basic access and paid additional features -- Garena adopts for many of its internet games could be hitting a bottleneck.

A man plays a game in an esports arena.

Image source: Getty Images.

Less balanced growth in e-commerce

Sea's adjusted e-commerce revenue from its online marketplace, Shopee, surged 262% sequentially to $34 million ($27 million on a reported basis). The newly monetized unit generated only $34,000 in sales a year earlier. Shopee's gross merchandise volume (GMV) surged 200% annually to $1.9 billion, as gross orders jumped 217% to 111.4 million.

Unfortunately, Shopee is still a money pit for Sea and the main reason it remains unprofitable. The unit posted an adjusted EBITDA loss of $180 million for the quarter, compared to a loss of $63 million a year earlier.

Shopee's expenses will likely keep rising as it tries to fend off well-financed rivals like Alibaba (BABA 4.92%)-backed Lazada. Both Shopee and Lazada claim to be Southeast Asia's biggest online marketplace -- but that claim is complicated by Sea's inclusion of Taiwan, a market which Lazada doesn't reach, in its GMV total.

Sea's digital financial services include its AirPay ecosystem of online wallets and payment counters. The unit's reported revenue rose 82% annually to $3.7 million, as its gross transaction value (GTV) grew 429% annually to $322 million. Sea didn't disclose the unit's adjusted EBITDA. However, AirPay already faces tough competition from Alibaba-backed Alipay, which absorbed Lazada's payments platform last year.

Rosy guidance with missing information

For the full year, Sea boosted its adjusted revenue guidance from $730 million-$770 million to $780 million-820 million -- which implies 41% to 48% growth. That forecast sounds rosy, but it would still mark a slowdown from its 59% growth in 2017. Sea also expects its e-commerce GMV to roughly double to $8.2 billion-$8.7 billion for the year, compared to its prior guidance of $7.5 billion-$8 billion.

However, Sea didn't provide any bottom-line guidance. That's troubling, since Sea plans to pour more money into its unprofitable e-commerce unit as it tries to counter Alibaba's aggressive expansion across Southeast Asia.

The bottom line

Sea's first-quarter report still didn't address the long-term concerns about the company. The stock isn't cheap, trading at five times this year's adjusted revenue estimate, and its losses could keep widening as it wages war against Lazada and Alibaba. Therefore, I'd steer clear of this stock until its bottom line stabilizes.

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