Sea Limited (SE 3.25%) competes in three high-growth industries: e-commerce, digital payments, and video games. Those tailwinds have sent the stock skyrocketing 1,190% over the last three years. In this Backstage Pass video, which was recorded on Nov. 16, 2021, Motley Fool contributors Trevor Jennewine and Brian Withers discuss Sea's third-quarter financial results, highlighting the opportunity for long-term investors.

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Trevor Jennewine: I imagine a lot of viewers are familiar with Sea Limited, but it is a holding company that primarily operates across seven markets in Southeast Asia and Taiwan. Though it has expanded in the Latin America and Europe, and we will touch on that in a moment. But if you're not familiar with Sea, it's a holding company that basically owns three businesses: Shopee as an e-commerce marketplace, Garena is a video game developer and publisher, and SeaMoney as a provider of digital financial services. Three high-growth markets.

If you took a look at the stock, it was down about 3% today. Let's take a look at the recent quarterly results. Revenue came in at about $2.7 billion. That was up 122%; another quarter of triple-digit growth for Sea. Beat on the top line. Then to break that into the three segments: Garena's revenue was up 93% to $1.1 billion. And within this segment, Garena is best known for Free Fire, a battle royale mobile game. It is the highest-grossing mobile game in Southeast Asia and Latin America, and it's held that title for the last nine quarters. It is also the highest grossing mobile game in India, and it's held that title for the last four quarters. So very strong competitive edge there in its gaming segment.

Shopee, the e-commerce marketplace, revenue was up to $1.5 billion, and that was up 134% over the prior year. And again, the company has a strong competitive position here. This is the most popular shopping app in Southeast Asia by a wide margin; it receives twice as many monthly views as the next closest competitor. It's also the second-most-popular shopping app in Brazil, so that's going to put it right behind MercadoLibre. Then in the third segment, SeaMoney, digital payments, revenue here was $132 million and that was up 818% from the prior year, so that platform is growing very rapidly.

Looking at the bottom line, the GAAP loss is $0.84 per diluted share, and that was a significant miss. That is primarily, I think, why the stock fell today. A miss on the bottom line. On the bright side, cash from operations through the first nine months of the year came in at $513 million, and that was up 39%. So at least generating positive cash flow.

In terms of the highlights, there's a few things I wanted to point out here. First is that its video game publishing and developing segment, Garena, is actually profitable; it operates at a profit. The operating margin was 55.6% in the most recent quarter, and that's actually higher than it was last year. It was 49% in the same quarter last year. So becoming increasingly profitable, and that provides Sea with some cash flow that allows it to invest in its other businesses.

On a negative note, Shopee's operating loss more than doubled. This, I think, has been something that's been a concern for investors. Shopee is losing more and more money over time. But I think if I could offer a few counter arguments as to why that would be a problem, Sea already has a strong competitive position in Southeast Asia. Like I mentioned, it receives twice as many views as the next closest marketplace. And it is expanding aggressively into areas like Latin America, and then Europe more recently launched, and it started recruiting sellers in Poland back in September. It's also mentioned moving into India, and more recently, Spain and France are apparently on the company's radar.

It has announced that it's providing free shipping in Europe, and so the logistics costs associated with that expansion, that's going to hit the company. Then it specifically mentioned increased marketing incentives and an increase in marketing expenses. They're providing deals, they're trying to generate interest with consumers and sustain or grow their market share. Generally speaking, I think that makes a lot of sense. E-commerce is a tremendous market opportunity. It's still growing quickly and it makes sense to try to maintain that strong competitive position that they've built. Generally speaking, I'm not too worried about Shopee's operating loss more than doubling. It's definitely something to pay attention to. But I think they have a profitable segment in Garena, and I think they have plenty of opportunity in e-commerce, and I think it makes sense to invest aggressively right now. 

Brian Withers: Trevor, do you mind if I wanted to double-click on that operating loss a little bit with you, too. Just so that our members understand, Sea Limited is primarily a third-party platform. If you look at the e-commerce revenue, the e-commerce revenue this quarter was $1.3 billion, and those were just for its third-party sales. It also is starting to get into the first-party business, which means they'll buy goods and then resell those goods. They'll buy them wholesale business-to-business, then sell them out business-to-consumer. That was about $279 million, so a sixth of the size. So the goods portion of it is actually profitable as well. They made about $30 million of gross profit from those $279 million goods and sales. Also the e-commerce business is profitable from the goods and services, but it's the marketing piece where they end up losing the money. I think about it, Trevor, as they have a great infrastructure. It's really just attracting folks to the platform, I think, is where they're spending that extra money.

Trevor Jennewine: Do you think it makes sense to be investing in marketing the way that they are, Brian?

Brian Withers: Yeah. They're starting to get into more and more countries. When you're going up against MercadoLibre that's been in the region since the 1990s, you need to do a little bit of advertising. Now, all of that money isn't advertising in Brazil, but they're expanding into more countries around the world. That's going to be part of the deal for a while.

Trevor Jennewine: Yeah, I agree. I read something recently that mentioned they might be looking at Argentina moving in. They're in Brazil and Mexico, and they might be looking at Argentina as well.

Brian Withers: At first I thought Sea Limited had reported a great quarter in Brazil [laughs] because I saw MercadoLibre took a stock hit today, but it was more related to, they were offering stock for raising cash. The timing was quite suspicious, but, you know ...

Trevor Jennewine: The last thing I'll mention is they did raise their e-commerce guidance. They're looking for $5 billion to $5.2 billion for the full year. That would be 135% growth.

All things considered, I think this was a fairly good quarter from Sea Limited. They are still losing money, but they have about $6 billion in cash on their balance sheet versus $1.8 billion in debt. The positive cash flow is a good thing. Then more broadly, there's still a lot of opportunity in their core Southeast Asia market. Internet penetration is still in the mid-70% range in Southeast Asia, compared to about 94% in North America. So there's plenty of room for that to grow. I was looking at a report earlier today that's forecasting that online spend is going to grow between four- and sixfold in Southeast Asia by 2030. It's going to grow from about $175 billion today to potentially $1 trillion by 2030. I think investing in their business the way that they are makes sense, that market is growing quickly, and I think it makes sense to stay on top of that opportunity.

Brian Withers: I'm a shareholder and just a fan of the report. Losing a couple of percent today on the stock -- five years from now you're not going to remember our discussion.