Is Sea Limited Stock a Buy Now?

Sea Limited's (SE -0.69%) stock price tumbled 14% on Aug. 16 following its second-quarter report. The Singapore-based tech company's revenue rose 29% year over year to $2.94 billion, which missed analysts' expectations by $90 million. Its adjusted net loss widened from $321 million to $570 million, or $1.03 per share, but it still beat the consensus forecast by $0.03.

On an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, Sea's loss widened from $24 million to $506 million. On a generally accepted accounting principles (GAAP) basis, its net loss more than doubled from $434 million to $931 million. Those headline numbers were messy, but does Sea's post-earnings stock price pullback represent a good long-term buying opportunity?

Image source: Getty Images.

Shopee is losing its momentum

Sea generated 59% of its revenue from its e-commerce business, which houses its online marketplace Shopee, during the second quarter. Its e-commerce revenue rose 51% year over year as its gross merchandise volume (GMV) and gross orders both increased by the high double digits. However, all three metrics have cooled off significantly over the past year.

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

Shopee generated most of its growth in its core markets of Southeast Asia and Taiwan, where it remained the top shopping app in terms of average monthly active users and average time spent in the app. Its newer Brazilian business also continued to expand in MercadoLibre's (MELI -0.45%) shadow and grew its revenue 270% year over year.

However, Sea also stopped providing revenue guidance for the e-commerce business amid "increasing macro uncertainties," which suggests it's bracing for another slowdown in the third quarter.

Shopee's adjusted EBITDA loss per order narrowed year over year from $0.41 to $0.33, but the segment's total adjusted EBITDA loss still widened from $580 million to $648 million. Therefore, Shopee might be losing less money on each order by reining in its discounts and shipping subsidies, but its ongoing expansion into new markets like Brazil will prevent it from breaking even anytime soon.

Another rough quarter for Garena

Sea generated 31% of its revenue from its digital entertainment segment, which houses its video game publisher Garena, in the second quarter.

Garena's top game is Free Fire, a battle royale game that was the most downloaded mobile game in the world in 2019, 2020, and 2021. Free Fire's success, along with the higher margins of the gaming business, previously enabled Sea to subsidize Shopee's losses with Garena's profits.

In other words, Sea balanced its entire business on a single mobile game. Unfortunately, Free Fire's growth decelerated after it was abruptly banned in India earlier this year. Competition from other games and a broader post-pandemic slowdown in gaming exacerbated that slowdown.

In the second quarter, Garena's quarterly active users (QAUs) declined 15% year over year to 619.3 million, its quarterly paying users (QPUs) dropped 39% to 56.1 million, and its total bookings plunged 40%. All three metrics fell year over year for the second straight quarter.

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

As a result, Garena's adjusted EBITDA declined 55% year over year to $334 million, which couldn't come close to offsetting Shopee's widening losses.

Instead of launching new games to succeed Free Fire, Garena is expanding the franchise with new modes and an enhanced version called Free Fire Max for higher-end devices. But if that all-in strategy fails, Sea's only profit engine will sputter out and its losses will deepen.

The fintech business is stabilizing

Lastly, Sea's digital financial services segment, which houses its SeaMoney payment platform and other fintech services, grew its revenue 214% year over year to $279 million. That accounted for 10% of Sea's top line in the second quarter. Its QAUs increased 53% to 52.7 million, while its mobile wallet's total payment volume (TPV) rose 36% to $5.7 billion. Some 40% of Shopee's quarterly active buyers across Southeast Asia also used SeaMoney's services during the quarter.

The segment's adjusted EBITDA loss narrowed from $155 million to $111.5 million, which suggests economies of scale are kicking in. But for now, this segment remains another dead weight on Sea's bottom line.

Is Sea's stock too cheap to ignore?

Sea faces tough near-term headwinds, but analysts still expect its revenue to grow more than 30% in both 2022 and 2023. Based on those expectations, its stock trades at just three times this year's sales. MercadoLibre, which is expected to grow at a comparable rate, trades at five times this year's sales. However, MercadoLibre's bottom-line growth is also much healthier than Sea's. Therefore, Sea's stock looks historically cheap -- but I wouldn't buy more shares until it stabilizes its core businesses.