Is Sea Limited Stock a Buy Now?

Sea Limited's (SE 1.20%) stock surged 14% on May 17 after the Southeast Asian tech giant posted its first-quarter earnings report. The company's revenue rose 64% year over year to $2.9 billion, which beat analysts' estimates by $40 million. Its adjusted net loss, which excludes stock-based compensation, widened from $320 million to $445 million, or $0.80 per share, but still exceeded analysts' expectations by $0.60.

Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at negative $510 million, compared to positive $88 million a year ago. On a generally accepted accounting principles (GAAP) basis, its net loss widened from $442 million to $580 million.

Sea's stock price popped after the report but remains down more than 60% this year. Should investors expect that rebound to continue?

Image source: Getty Images.

Shopee is still growing like a weed

Sea's e-commerce revenue, which comes from its online marketplace Shopee, rose 64% year over year to $1.5 billion. Its gross merchandise volume (GMV) increased 39% to $17.4 billion as its gross orders soared 71% to 1.9 billion.

All three growth rates decelerated, but they were still impressive, compared to its triple-digit growth rates a year ago:

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

However, the segment's adjusted EBITDA loss still widened from $413 million to $743 million, while Shopee's adjusted EBITDA loss per order widened from $0.38 to $0.40.

Sea mainly attributed those widening losses to its headquarters' common expenses (HQ costs), which are essentially the operating expenses it incurs from expanding its workforce, building new facilities, and using cloud hosting services.

Excluding those HQ costs, Shopee only incurred an adjusted EBITDA loss of $0.04 per order in its core markets (Southeast Asia and Taiwan), compared to $0.12 a year ago. Its adjusted EBITDA loss of $1.52 per order in Brazil also represented a 45% improvement from last year.

Based on those improvements, Sea believes Shopee can achieve a positive adjusted EBITDA this year after excluding HQ costs. However, its adjusted EBITDA will likely stay in the red after including those expenses.

For the full year, Sea expects its e-commerce revenue to rise about 72%, compared to the segment's 136% growth in 2021.

Garena's growth continues to cool off

Sea's digital-entertainment revenue, which comes from its video game publisher Garena, rose 45% year over year to $1.1 billion. However, its bookings -- which more accurately reflect the underlying growth of video game companies -- declined 27% to $0.8 billion. Its quarterly active users (QAUs) also fell 5% to 615.9 million as its quarterly paying users (QPUs) dropped 23% to 61.4 million.

Garena's growth cooled off as its top game Free Fire -- which launched in 2017 and became the world's most downloaded game in 2019, 2020, and 2021, according to App Annie -- gradually lost its momentum. The game was also unexpectedly banned in India earlier this year.

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

Free Fire's slowdown is a bright red flag for Sea since it usually leverages Garena's profits to offset Shopee's losses. But in the first quarter, Garena's adjusted EBITDA fell 40% year over year to $413 million.

Sea didn't provide any guidance for Garena, but its slowdown will likely continue unless it aggressively rolls out new games, reverses its ban in India, and locks in new users with Free Fire Max, an upgraded version of the game for higher-end devices.

The fintech segment's losses are stabilizing

Lastly, Sea's oft-overlooked digital financial services segment, which houses its Sea Money payment platform and other fintech services, continues to grow. The segment's revenue surged 360% year over year to $236 million, as its adjusted EBITDA loss narrowed from $153 million to $125 million. Sea Money's QAUs increased 78% year over year to 49 million, and the total payment volume (TPV) of its mobile wallet jumped 49% to $5.1 billion.

Sea Money's ability to expand without racking up wider losses is encouraging, but this business probably won't achieve a positive adjusted EBITDA anytime soon.

Sea needs to narrow its losses

Analysts expect Sea's revenue to rise 35% to $13.5 billion this year, but they expect its adjusted EBITDA loss to widen from $594 million to $2.1 billion. Sea's stock might seem cheap at three times this year's sales, but investors probably won't pay a higher premium for the stock until it stabilizes Shopee's adjusted EBITDA losses after including its soaring HQ costs.

Until that happens, other e-commerce stocks like MercadoLibre -- which is growing at a similar rate as Sea but generating more stable profits -- will likely be better all-around investments.