Shares of Sea Limited (SE 1.28%) are soaring 18.1% this week compared to where they closed last Friday, according to data compiled by S&P Global Market Intelligence, after the Singapore-based e-commerce and gaming stock reported better-than-expected third-quarter results.
Yet these results might not have been so much about how well it did in the quarter that just passed, but rather what it foresees in its immediate future: a laser-like focus on achieving profitability. Even better for investors, management is thoroughly aligning its interests with those of its shareholders.
On the company's third-quarter call, chairman and CEO Forrest Li shared that the marketplace is changing, so Sea Limited needs to adapt as well, or it will fall by the wayside and fail. As part of that process, Sea has "entirely shifted our mindset and focus from growth to achieving self-sufficiency and profitability as soon as possible."
To ensure the company works as a unit on achieving that goal, Li reemphasized that Sea will no longer dole out any cash compensation to management until self-sufficiency is achieved. It's also going to end its fast-spending ways on office space, logistics facilities, and travel and entertainment.
Investors apparently like what they are hearing, as the new policies reflect a thinking that the company is not just some cash cow that can be milked for frivolous things. It's a sign of maturity that Sea is coming to grips with the realities of the environment and taking steps to become financially responsible.
The early results of this austerity program are already beginning to pay off. Sea Limited now expects its Shopee e-commerce site to be breakeven on an adjusted EBITDA basis by the end of 2023, an accelerated time frame from its prior expectation of break-even status by 2025.
That's not to say profitability won't come at the expense of growth in certain metrics. In fact, Li expects it may even be negative at times. However, the overall drive for pursuing positive cash flows and self-sufficiency will benefit in long-term growth. Shopee's marketplace revenue jumped 54% in the quarter on better fees and advertising, even as it was able to reduce sales and marketing expenses 15% during the period.
And to prove there will be headwinds, its online gaming platform Garena is still being hurt by the trends resulting from a reopened economy. With recessionary winds blowing globally, Sea is also being buffeted by weakness in consumer discretionary spending.
That's seen as well in its fintech platform, SeaMoney, which is causing management to keep a tight check on its credit business and loan book, even as revenue jumped almost 150% year over year and adjusted EBITDA losses declined 57%.