Why Sea Limited Stock Jumped Higher Today

What happened

Shares of Sea Limited (SE 4.19%) jumped on Tuesday after financial results surprised investors with strong profitability. As of 10:30 a.m. ET, Sea Limited stock was up almost 15%.

So what

Sea Limited does business in e-commerce, gaming, and financial technology. And until recently, it was growing at breakneck speed. However, steep losses caused management to pull back on growth, even closing up shop in some areas. This brought the stock market's expectations for Sea way down.

In the fourth quarter of 2022, Sea generated revenue of almost $3.5 billion, which was up 7% year over year and far exceeded Wall Street's expectations. But the big surprise was that the company earned $423 million in net income -- roughly a $1 billion swing from its net loss of $616 million in the same quarter last year.

It's rare to see a company like Sea pivot from steep losses to strong profitability in such a short time while still maintaining some top-line growth. And that's why Sea stock was up today.

Now what

Sea was profitable in Q4 according to generally accepted accounting principles (GAAP), and this is an accounting number that can often distort the clearest picture of profitability. Therefore, given the magnitude of the improvement, I fully expected to find a significant asterisk regarding Sea's $423 million profit. However, I was wrong: Sea primarily achieved profitability thanks to one big decision, and it bodes well for the company's future.

In Q4, Sea slashed its sales-and-marketing expenses by 61% compared to the prior-year period. In dollar terms, the company spent almost $750 million less on this line item than in the same quarter last year. And it did so without sacrificing revenue growth.

During the conference call, Sea's management repeatedly said it lowered this expense through the "optimization" of its spending, which is somewhat vague. But to me, the operating leverage it's enjoying in this area demonstrates that the business is increasingly top of mind in its markets. And that could point to future top-line gains.