Sea Limited's (SE -0.76%) stock price skyrocketed 36% on Nov. 15 as investors responded to the company's third-quarter earnings report. The Singapore-based e-commerce and gaming company's revenue rose 17% year over year to $3.2 billion, which beat analysts' expectations by $190 million, as it slightly narrowed its net loss from $571 million to $569 million.

On an adjusted basis that excludes its stock-based compensation, Sea narrowed its adjusted net loss from $448 million to $374 million, or $0.66 per share, which also topped estimates by $0.29. But on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, its net loss more than doubled from $165 million to $358 million.

An online merchant processes an order on a phone and laptop.

Image source: Getty Images.

Sea's headline numbers cleared analysts' low expectations, but its stock price remains down more than 70% this year, and it still faces plenty of headwinds. Let's see if Sea could be worth buying as a turnaround play for 2023.

Why did the bulls abandon Sea?

Sea operates two core businesses: Shopee, the e-commerce leader in Southeast Asia and Taiwan, and Garena, a video game publisher that generates most of its revenue and profits from a battle royale game called Free Fire. It also operates a smaller fintech business, which integrates its SeaMoney payment services into online and offline purchases.

Sea's only profitable business segment is Garena. In the past, it relied on Garena's profits to subsidize the aggressive expansion of its unprofitable e-commerce and fintech businesses. But that strategy collapsed over the past year as fewer people played Free Fire in a post-pandemic market. An unexpected ban on Free Fire in India, one of its fastest-growing markets, exacerbated that painful slowdown over the past few quarters.

As Sea's core profit engine imploded, Shopee's growth decelerated against tough comparisons to the pandemic. That slowdown forced Sea to dramatically scale back Shopee's overseas expansion plans and cut costs.

Has Sea addressed its biggest problems?

Sea's revenue rose 101% in 2020 and grew 128% to $10 billion in 2021. But in the first nine months of 2022, its revenue only increased 34% year over year to $9 billion. Analysts expect its revenue to increase by 21% for the full year.

Shopee's deceleration, as reflected in its gross merchandise volume (GMV, or the value of all goods sold on its platform) persisted in the third quarter with just 14% year-over-year growth. Garena's bookings fell 45% year over year, representing its third consecutive decline, while its total quarterly active users (QAUs) shrank 22% to 568.2 million. Sea now expects Garena's bookings to decline 39%-43% for the full year, compared to its prior guidance for a milder decrease of 33%-37%.


Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Shopee GMV Growth (YOY)






Garena Bookings Growth (YOY)






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

Sea is still gushing red ink as its growth cools off. Shopee generated $4.2 billion in revenue in the first nine months of 2022, but still racked up an operating loss of $2.1 billion. Those losses can be attributed to its heavy dependence on discounts and subsidies to drive its GMV growth, as well as the ongoing expansion of its logistics network. The fintech division generated $842 million in revenue in the first nine months of the year, but it incurred an operating loss of $339 million.

Those losses might be less alarming if Garena were still cushioning the blow by generating stable profits. But in the first nine months of 2022, Garena's operating profit fell 4% year over year to $1.57 billion as its bookings and QAUs tumbled. Garena says it still has more self-developed games in its pipeline, but it hasn't officially revealed any major games yet and is still heavily dependent on Free Fire and several licensed games from Tencent.

Sea doesn't expect Shopee to turn profitable, or for Garena's growth to accelerate anytime soon. Instead, it's focusing on cutting costs to stabilize its margins. It reportedly laid off 7,000 employees (10% of its workforce) over the past six months, according to The Information, while CEO Forrest Li said the company had "entirely shifted our mindset and focus from growth to achieving self-sufficiency and profitability as soon as possible" during its latest conference call.

A long uphill battle

Sea won't go bankrupt anytime soon, thanks to a shrewdly timed debt and stock sale (while its stock was hovering near all-time highs) last year, and it ended the third quarter with $6.3 billion in cash and equivalents. But it still faces a lot of near-term challenges, and analysts expect it to remain unprofitable through at least 2024.

Sea doesn't look expensive at 2.4 times next year's sales, considering that its Latin American counterpart MercadoLibre trades at 3.9 times next year's sales. But MercadoLibre is also more profitable than Sea, doesn't rely as heavily on discounts and subsidies, and doesn't publish any video games. Simply put, investors shouldn't turn bullish on Sea until it meaningfully stabilizes its revenue growth and operating margins.