Investors in Sea Ltd. (SE -1.07%) have had a tough time as the stock declined more than 80% over the last few months. Struggles in India, a challenging macro environment, and economic reopenings have hurt Sea's businesses across gaming, e-commerce, and digital payments.

The effects were clear as Sea reported its second-quarter results with revenue growth slowing to 29% year over year and its net loss doubling. Worse, there seems to be no end at sight to Sea's recent challenges.

Garena's woes continue in the latest quarter

Once a solid performer, Garena, the company's gaming segment, has struggled over the last few quarters as user engagement declines amid economic reopenings.

Garena's second quarter results highlight some of its challenges. Bookings fell 39% year over year to $717 million. This was the third consecutive quarter-on-quarter decline after the gaming division reached $1.2 billion in peak bookings in the third quarter of 2021. The lower bookings resulted from falling quarterly active users (QAUs) and quarterly paying users (QPUs).

Garena's weakening performance is dreadful for Sea, because the parent company previously relied on the subsidiary's cash flow to fund growth in the e-commerce and digital finance segments. With Garena's profitability falling quickly, Sea's adjusted earnings before interest, tax depreciation, and amortization (EBITDA) deteriorated year over year from a loss of $24 million to a loss of $506 million -- the gaming segment can no longer offset losses from the other segments.

On a slightly positive note, Garena's QAUs have stabilized at 619 million after reaching a low of 616 million last quarter. At their peak in the third quarter of 2021, QAUs totaled 729 million. The decline was partially a result of India's decision to ban Garena's hit mobile title Free Fire, though the financial impact of the ban was small. If QAUs remain at this level or improve, Garena's bookings trend might turn around in the next few quarters.

Free Fire remained the highest-grossing mobile game in Southeast Asia and Latin America in the second quarter, suggesting the challenging performance is likely an industrywide problem rather than company specific.

A pivot in Shopee's growth strategy

As Garena's bookings fall, investors hope that Shopee, Sea's e-commerce unit, can carry the baton to sustain the company's growth.

So far, Shopee has been executing well, delivering some impressive growth. In the latest quarter, the unit's revenue grew 51% year over year to $1.7 billion, thanks to 27% growth in gross merchandise value (GMV) to $19.0 billion and an improvement in Shopee's take rate. Yet Shopee's high growth rate caused a further deterioration in adjusted EBITDA for the business unit: a loss of $648 million compared to a loss of $580 million last year.

Shopee's deepening losses resulted from its decision to invest in scaling up its Latin America business and strengthening its lead in Southeast Asia. Historically, Sea could afford to suffer these losses thanks to the ever-growing cash flow from Garena. Today, such a strategy is becoming too burdensome as Garena's adjusted EBITDA fell 55% to $334 million last quarter.

So the tech company is shifting its focus from a growth-at-all-costs strategy to emphasizing efficiency, profitability, and cash flow management. On a positive note, this signals that Shopee losses should narrow in the coming months, which is crucial as Sea needs to conserve cash to survive the more challenging operating environment.

The downside to this change is that Shopee's growth may also decelerate in the coming quarters. Management also decided to suspend its 2022 full-year guidance for the e-commerce segment amid the strategy shift.

What's next for Sea?

In 2021, the sky was the limit for Sea. Garena was generating enormous cash flow, while Shopee was expanding everywhere: in India, Europe, and Latin America.

Today, Sea's prospects look bleak as Garena's profitability continues to fall, while Shopee's growth is likely to decline in the next few quarters as well.

The strategic pivot is paramount in addressing Sea's sky-high cash burn rate. To put it into perspective, the company consumed $4 billion in the last three quarters, reducing its cash and short-term investments balance to $7.8 billion. At this rate, it will run out of cash in less than two years!

I think Sea's decision to slow down is rational and prudent. At least it will allow the company to consolidate its recent growth, build up its reserves and capacities, and then resume its expansion. It's a marathon, not a sprint.