Shares of Sea Limited (SE) recently hit an all-time high after the Southeast Asian gaming and e-commerce company posted its third-quarter numbers. Its total "adjusted" revenue, which includes deferred revenue and revenue that was net-off against sales incentives -- rose 214% annually to $763.3 million, beating estimates by $62.6 million. Its total GAAP revenue rose 198% to $610.1 million.

Sea's adjusted EBITDA loss narrowed from $183.8 million to $30.8 million, as its non-GAAP net loss -- which excludes stock-based compensation and the changing value of its convertible notes -- narrowed from $237.6 million to $175.2 million. On a GAAP basis, its net loss narrowed from $218 million to $206.1 million.

Sea's triple-digit revenue growth is impressive, but is it making enough progress on the bottom line? Let's dig deeper into its third-quarter report to see if this stock still has room to run.

Promotional art for Garena's Free Fire.

Image source: Garena.

Garena remains its core growth engine

Sea generated 59% of its adjusted revenue from its Garena digital entertainment unit during the quarter. This division licenses games from publishers like Tencent (TCEHY -1.49%) and Activision Blizzard (ATVI), and produces first-party games like Free Fire.

The unit's adjusted revenue rose 212% annually to $451 million during the quarter. Its adjusted EBITDA surged 395% to $53.7 million, boosting its adjusted EBITDA margin from 37.2% to 59%. Quarterly active users (QAUs) across its games rose 82% to 176.1 million. 9.1% of those QAUs were paid players, up from just 4.1% a year ago. As a result, its average revenue per user (ARPU) jumped 75% to $1.40.

Sea attributed most of that growth to its self-developed battle royale game Free Fire, which grossed over $1 billion since its launch two years ago. It's currently the highest-grossing mobile game in Latin America and Southeast Asia, according to App Annie, and remains one of the five most downloaded games in the world.

Sea also expects its recent launch of Activision and Tencent's Call of Duty: Mobile in Southeast Asia and Taiwan to boost the gaming unit's growth. That's why it hiked its full-year adjusted revenue guidance for the digital entertainment unit from $1.6-$1.7 billion to $1.7-$1.8 billion -- which implies 157%-172% growth from 2018.

But Shopee is still a money pit

Sea's e-commerce unit, Shopee, generated 34% of its adjusted revenue during the quarter. Shopee is one of Southeast Asia and Taiwan's biggest e-commerce marketplaces, and its main rival is Alibaba's (BABA -0.39%) Lazada.

A woman goes shopping on her smartphone.

Image source: Getty Images.

Shopee's top-line growth looks stellar. Its adjusted revenue surged 261% annually to $257.2 million, gross orders jumped 103% to 321.4 million, and its gross merchandise volume (GMV) -- the value of all goods sold on its platform -- rose 70% to $4.6 billion.

Shopee's adjusted revenue as a percentage of its total GMV rose from 2.6% a year ago to 5.6%, which indicates that its take rate (the percentage of each order it retains as revenue) is rising. It also raised the e-commerce unit's full-year revenue guidance from $780 million-$820 million to $880 million-$920 million, which implies 203%-217% growth from 2018.

But Shopee continues to lose money on every order. It reduced its adjusted EBITDA loss per order from $1.36 to $0.79 (and even achieved a quarterly adjusted EBITDA profit in Taiwan), but its total adjusted EBITDA loss still widened from $214.9 million to $253.7 million as it processed more orders from lower-margin markets.

That's troubling since Alibaba -- which more than doubled Lazada's orders annually last quarter -- can leverage the profitability of its Chinese marketplaces to pressure Shopee with lower-margin or loss-leading strategies. Sea's AirPay digital payments platform, which it's integrating into Shopee, also faces tough competition from Alibaba-backed Alipay -- which is already tightly tethered to Lazada.

Does Sea still have room to run?

Sea's gaming business looks solid, but its profits are repeatedly being wiped out by Shopee's widening losses. The stock had a good run, but I wouldn't buy it until Shopee posts a few quarters of narrowing losses -- which would prove that it isn't buckling under the competitive pressure from Lazada and other regional rivals.