Is Sea Limited Stock a Buy Now?

Sea Limited's (SE 4.73%) stock price tumbled 13% on March 1 after it posted its fourth-quarter earnings report. The Singapore-based tech giant's revenue soared 106% year-over-year to $3.2 billion, beating analysts' estimates by $230 million. But on a generally accepted accounting principles (GAAP) basis, its net loss widened from $525 million to $616 million.

On a non-GAAP basis, Sea's net loss widened from $430 million to $485 million, or $0.88 per share, which still beat estimates by three cents. On an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, it posted a loss of $492 million, compared to a profit of $49 million a year earlier. 

Let's dive deeper into Sea's numbers, why they sparked a post-earnings sell-off, and if investors should consider buying this beaten-down growth stock.

Image source: Sea Limited.

Shopee continues to grow like a weed

Shopee's e-commerce revenue rose 89% year over year to $1.6 billion during the fourth quarter. Its gross merchandise volume (GMV) rose 53% to $18.2 billion, while its gross orders increased 90% to 2.0 billion.

Those growth rates are impressive -- especially on top of its triple-digit growth a year ago -- but its gradual slowdown is also easy to spot:

Data source: Sea Limited. YOY = Year over year.

To seek out fresh growth, Shopee is expanding beyond Southeast Asia and Taiwan by entering competitive overseas regions like Latin America, India, and Europe. But all those loss-leading efforts also caused Shopee to incur an adjusted EBITDA loss of $0.45 per order across all of its regions, compared to a loss of $0.41 per order a year earlier.

As a result, the adjusted EBITDA loss of the e-commerce segment more than doubled year-over-year from $428 million to $878 million. Those losses could continue to widen as Shopee ramps up its overseas expansion.

Sea expects Shopee's revenue to rise approximately 76% in 2022. That would represent a slowdown from its 136% growth in 2021, but it would still be one of the fastest-growing e-commerce companies in the world.

Garena faces some tough headwinds

Garena's digital entertainment revenue rose 104% year over year to $1.4 billion. But the segment's bookings -- which are a more accurate gauge of growth for a video game company -- grew just 7% to $1.1 billion.

Garena's quarterly active users (QAUs) increased 7% to 654 million and its quarter paying users (QPUs) rose 6% to 77.2 million, but its ratio of paying QAUs dipped 20 basis points to 11.8%. All those growth rates have decelerated significantly over the past year.

Data source: Sea Limited.

That slowdown occurred because Garena's top game Free Fire lost its momentum in a post-lockdown world as people played fewer games. Nonetheless, Free Fire remained the most downloaded game worldwide for the third year in a row in 2021, according to App Annie's latest rankings.

Unlike Shopee, Garena is firmly profitable on an adjusted EBITDA basis, and Sea frequently leverages Garena's profits to subsidize Shopee's growth. It also supports the expansion of its unprofitable Sea Money fintech unit.

However, Garena's adjusted EBITDA declined 9% year over year to $603 million during the quarter. That wasn't nearly enough to offset Shopee and Sea Money's losses, so Sea's total adjusted EBITDA loss widened significantly.

The bulls believe Garena will keep growing as it refreshes Free Fire and launches new video games. But in 2022, Sea expects Garena's bookings to decline 33%-37%, compared to its 44% growth in 2021. Sea mainly attributes that abrupt slowdown to the recent ban on Free Fire in India, one of its fastest-growing markets. That guidance might be too bearish if Sea gets the ban lifted, but it seems to be bracing for a worst-case scenario right now.

Sea Money's growth is a double-edged sword

In 2022, Sea expects its digital financial services revenue to rise 155% to about $1.2 billion. That top-line growth might offset Garena's slower bookings and revenue growth, but it will also likely exacerbate Sea's widening losses.

That's because Sea's digital financial services segment posted an adjusted EBITDA loss of $617 million in 2021, compared to a loss of $511 million in 2020, and will likely post an even wider loss in 2022. That flood of red ink -- along with Shopee's massive losses -- will completely overwhelm Garena's declining profits.

A sea of near-term challenges

Analysts expect Sea's revenue to grow about 37% in both 2022 and 2023. Those are impressive growth rates for a stock that trades at five times this year's sales, but its adjusted EBITDA losses are also expected to widen.

Those challenges arguably make Sea a less appealing investment than its Latin American rival MercadoLibre (MELI 2.02%), which will likely generate comparable revenue growth over the next two years with a better-diversified business model and a positive adjusted EBITDA. Therefore, I personally wouldn't buy more shares of Sea until Garena's growth stabilizes.