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Will Sea Limited Ever Be Profitable?

By Billy Duberstein – Oct 28, 2021 at 7:22AM

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Sea Limited isn't profitable today, but certain under-the-hood indicators point to a very different future.

In this recent episode of "Beat & Raise," we look at the hyper-growth but loss-making Sea Limited (SE -2.81%). Sea Limited's stock is up a stunning 2,000% from its late 2017 IPO, but the company has never turned a profit. In this Fool Live video clip, recorded on Oct. 18, Fool.com contributor Billy Duberstein analyzes the company's Q2 2021 earnings presentation, and explains why he believes Sea Limited's rapid rise is the real deal. 

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Billy Duberstein: Basically, Sea Limited is a high-revenue growth, loss-making company. So, whenever you're looking at a company that doesn't have current profits, you want to assess, "will they likely be able to make profits in the future?" 

So there are a couple, uh, wrinkles in Sea Limited's presentation that gives me confidence that they'll be able to do that in the future in a big way. Now, they, you know, they have three sections. So they're going to go section-by-section here. 
First up: On digital entertainment. Quarterly active users. This is pretty self-explanatory. Forty-five percent growth. Pretty impressive, considering we're lapping the onset of the pandemic here. Sea Limited just sees no let-up. But look at this: quarterly paying users up 85%. Remember Sea limited distributes free-to-play games. Free Fire is a free-to-play game. So, ultimately you want your users eventually reaching into their wallets and paying for items. 
Clearly, Free Fire is spurring people to do that, because while they only have 92.2 paying users and
out of 725.2 total users, the proportion of paying users is going up. So that's one bullish sign, a trend you can extrapolate, perhaps, that Sea Limited is good at monetizing products that they might give away for free or at low cost right now.
Next up: on e-commerce. Now, I might have to switch in between slides here. So, gross orders. Total orders up 127% year over year. GMV, that's the total value of all items shipped during the quarter of 88%. It's actually a lower number. So at first you think well, that might -- people are ordering, they're making more orders, but they're not ordering as much stuff, which is true. But remember, second quarter we're lapping the onset of the pandemic when people are ordering everything online. So there's a little bit of noise coming out of the pandemic. However, if you go back to the revenue growth, up on the first slide here, 161% year-over-year growth in e-commerce revenue. That is a larger number than their GMV. In fact, it's almost twice the growth rate. So that tells me they're making more revenue per item now than they were in the past. Which means they're either -- their advert -- their merchants are paying more for advertising, they're increasing their take rate, they're charging for logistics more, because they're taking that in-house. It's another promising sign around their monetization. 
Digital Financial Services, their third category. Total payment volume, their total payment volume is up 150%, total paying users up 109%. So, their volume is up more than their total user growth. So, their customers -- each customer is buying more stuff through their wallet. Another promising sign. And of course 109% user growth is not too bad either.
So, these are the types of things -- this is an also an important one. Total gross profit up 364%. That is roughly double the revenue growth rate, 159% growth in GAAP revenue; 364% in gross profit. More of those dollars are falling to its bottom line. Gross profit is very important to look at when you have another high-growth company that's investing a lot in operating expenses which we'll get to here.
Sales and marketing, research and development, and general administrative, that can be thought of as investments in future growth. So if a company is still making losses -- look, their loss actually expanded. This is their EBITDA loss, actually expanded. But the gross profit margins expanded. That means that they are choosing to spend more in research and development, sales and marketing. They're choosing to spend more, they don't -- uh, they're not a fundamentally unprofitable business, they're choosing to invest in sales and marketing and research and development. But this more than doubled, this nearly tripled. So you can extrapolate, hey, they're choosing to spend all this money. They could be profitable, likely, if they wanted to. 
So, when you're looking at presentations, you know going through each line item and comparing it to revenue growth and to user growth these can give you hints about a high growth company and whether it may become profitable one day. 

Billy Duberstein owns shares of Sea Limited and has the following options: short January 2022 $170 puts on Sea Limited. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Sea Limited. The Motley Fool has a disclosure policy.

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