Singapore-based conglomerate Sea Limited (SE 4.34%) was a pandemic hero, soaring more than 900% from early 2020 to late 2021.
But investors now fear the stock has become a zero after shares have fallen just over 80% from their peak. Volatility like that is extreme, and it's understandable if investors are riding a roller coaster of emotions. But don't panic; here is why Sea Limited should be fine over the long term.
Coming down from the pandemic highs
Sea Limited is a conglomerate built from a collection of three primary businesses. It has an e-commerce business called Shopee, which is the largest e-commerce retailer by traffic in Southeast Asia. Sea also has a gaming division called Garena; its mobile-game Free Fire has been among the most-downloaded games in the world for the past three years. Lastly, Sea has a digital wallet segment called SeaMoney with 52.7 million active users.
The company operates primarily in Southeast Asia, one of the world's most internet-affluent populations. The average person in the region spends eight hours on the internet daily, and roughly half of the region's 670 million population is under 30. COVID-19 and the lockdowns during the pandemic were massive tailwinds that caused Sea's business to grow:
SE Revenue (TTM) data by YCharts.
But now, the company's growth is falling; CEO Forrest Li pointed to a mix of economic uncertainty, a strong U.S. dollar, and ongoing reopening trends as new challenges to the business. Sea's Garena division, its profit engine, has seen paying users decline since late 2021.
That trend continued in the second quarter of 2022; active users fell 15% year over year, and paying users fell 39%. In other words, people are not gaming as much as when lockdowns forced them to stay in their homes.
Putting out the cash-burning fire
Garena's struggles have turned Sea from a cash printer to a cash burner, and free cash flow has plunged into negative territory over the past year. Investors should note that Sea Limited has spent a lot of money to grow its business, including taking on Latin America with its Shopee business. Free cash flow has dried up, but you can see below that the gross profit margin has remained stable, signaling that the core business is still as profitable as before.
SE Free Cash Flow data by YCharts.
The company can slow its cash burn by cutting back on some of its sales and marketing expenses, which total $4.2 billion over the past year, more than a third of total revenue. Forrest Li even hinted at such in the Q2 earnings call, noting that Sea will be more tightly managing operating expenses and specifically named sales and marketing among the focus areas.
A financial safety net
In the meantime, Sea has plenty of cash to sustain itself in the short and long term. Sometimes being lucky is better than being good; the company had a very well-timed $6.3 billion capital raise, issuing stock when shares were trading at high prices last September. Management probably didn't know the stock price would collapse, but a high share price is typically a great time to raise money.
Sea now has $7.8 billion in cash and short-term investments, enough money to last the business for a while, assuming its losses don't dramatically increase beyond the $1.4 billion burned over the past year.
The financials around Shopee and SeaMoney could improve as they grow, and management's comments about reining in spending should help stabilize losses in the meantime. Sea Limited remains a market leader in Southeast Asia, so it's reasonable to expect the company to continue growing in the future. Short-term hiccups? Sure, but investors shouldn't count out Sea Limited anytime soon.
