The current market environment has gotten flipped on its head compared to the past few years. In 2021 and 2020, many investors cared little about profitability and cash generation. Instead, they focused on companies attacking large addressable markets and prioritized a company's potential. Now that the tides have turned, these high-growth stocks have gotten beaten down for their lack of profitability.
Sea Limited (SE 5.21%) is one of these stocks that has gotten crushed. Shares are down almost 68% year to date, and its profitability has continued declining. During 2020 and 2021, investors were seemingly satisfied with the company's high expansion rates, but now some investors are asking: When will Sea Limited become profitable?
It's clear that this e-commerce, gaming, and fintech giant won't reach consistent profitability anytime soon. So should investors jump ship or remain patient for the next few years?
Sea Limited's profitability woes
From 2019 to the start of 2022, Sea Limited was able to post close to triple-digit, year-over-year revenue increases almost every quarter, making it clear that the company focused on gaining adoption rather than being profitable. The company did have one cash cow keeping its profitability afloat: its gaming service. In the second quarter of 2021, its gaming segment generated $741 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), almost fully offsetting the losses that Sea's e-commerce and fintech businesses were generating.
Now, however, gaming is losing steam. Free Fire, Sea Limited's popular mobile game, was the primary driver of its gaming business. As Free Fire started to drop in popularity, so did Sea's gaming success. In Q2 2022, the company only had 619 million quarterly active users in its gaming segment -- 15% less than the year-ago period. As a result, revenue fell 10% year over year to $900 million in Q2, and adjusted EBITDA for gaming plunged to $334 million over the same period, representing a 55% year-over-year decline.
With its cash cow not generating that much cash anymore, Sea's overall adjusted EBITDA plummeted. In Q2 2022, the company lost over $506 million in adjusted EBITDA, which is quickly moving in the wrong direction.
Additionally, the company's cash burn is accelerating. In the first six months of 2022, Sea Limited burned $1.2 billion in cash from operations, a sharp decline from the $451 million in cash generated from operating activities in the year-ago period.
Reasons to be optimistic
That said, there are reasons to be optimistic about the future. While Sea's current unprofitability doesn't look great, the company is doing many things right. This could suggest that this unprofitability could turn around over the coming years.
First, Sea has begun to shift its focus toward profitability and away from growth at all costs. With profitability and cash flows now the main priority for the company, investors could see improvements on this front. The company is already making minor strides toward profitability. In Q2, Sea Limited's e-commerce segment -- Shopee -- is seeing better unit economics per order. Shopee's adjusted EBITDA loss per order improved 21% year over year to $0.33 in Q2. In Southeast Asia and Taiwan, Shopee's adjusted EBITDA loss per order (excluding headquarters expenses) was roughly flat.
Sea Limited's fintech platform, SeaMoney, is also getting better. SeaMoney's adjusted EBITDA loss in Q2 was $111.5 million, an improvement from a $155 million loss in the year-ago period. While there's still a lot of work to do, it's encouraging to see the company taking steps to manage profitability.
The long-term picture for Sea Limited
If there's one company that can burn this much cash, it's Sea Limited because of its rock-solid balance sheet. The company has more than $7.8 billion in cash on the balance sheet, along with another $1.3 billion in short-term investments. The company's trailing-12-month free cash flow burn of $1.45 billion remains flat, even for five years, the company would still have $1.8 billion in short-term investments and cash left over.
That said, this company needs to start making its way toward profitability. If Sea does not see adjusted EBITDA and cash flow progress over the coming years, that could signal the company is struggling on this front.
With things moving in the right direction, it's reasonable to think that Sea Limited's cash burn could improve over the coming years. Its newfound focus on profitability will likely spur this shift as well. Therefore, it's reasonable to believe that Sea Limited could achieve some form of profitability without needing to raise capital. However, this should be watched with a close eye.