Sea Limited (SE 0.56%), the leading technology company based out of Singapore, delivered an unexpected profit in the fourth quarter of 2022. Investors were pleased with this result as the company's first-ever profitable quarter came earlier than expected. But beyond these headline numbers lie a few crucial things that the most savvy investors have noticed.
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Its recent profit needs to prove sustainable
When the COVID-19 pandemic hit three years ago, Sea was at the right place to grow its e-commerce business, Shopee. At that time, investors focused on how fast the company could expand its e-commerce business. So naturally, the main focus was investing heavily in user growth, which resulted in heavy losses.
But in the last 12 months, there was a complete change in investors' sentiments and expectations as the world reopened and the COVID-19 lockdown subsided. They wanted Sea to demonstrate growth and profitability at the same time. The concern then was that Shopee's business model might never turn profitable.
Fortunately, the tech conglomerate delivered operating profit across all three segments -- gaming, e-commerce, and digital financial services -- in the fourth quarter of 2022. As a result, the total net income for the group came in at $423 million, a significant turnaround from a net loss of $616 million in the previous period.
While it is undoubtedly a positive sign that the company has delivered a profit for the first time, investors should note that the profitability was primarily due to one-off, non-operating events. There was a $200 million gain on debt extinguishment and a $130 million reversal of accruals for certain expenses.
Besides, Sea cut shipping and discount vouchers while raising merchant fees on Shopee. While a cut in user subsidies could help boost margins in the short term, it's unclear whether the company can sustain its e-commerce marketplace activity after these changes. Furthermore, it's not clear how much higher Sea can increase merchant fees, given that merchant take rates (10%) are already high compared to Alibaba's take rate (less than 5%) in China.
In short, it will take a few more quarters of sustainable profit before investors can finally declare that Sea's turnaround is sustainable.
Sea is quietly growing its financial arm
Historically, investors have focused on Sea's gaming and e-commerce businesses. Yet, Sea's up-and-coming digital financial services arm (SeaMoney) is quietly growing and becoming an essential part of the conglomerate.
As a starter, SeaMoney provides various services, including mobile wallets, credits, insurance, and digital banking, in Taiwan and across seven Southeast Asia countries. The fintech leverages the users of its sister companies, Garena and Shopee, to provide digital financial services. And thanks to the various tailwinds, such as increased mobile wallet penetration and digitalization of financial services, SeaMoney demonstrated some solid financial performance.
In 2022, SeaMoney's revenue grew by 160% to $1.2 billion, while adjusted earnings before interest, taxes. depreciation, and amortization (EBITDA) came in positive in Q4 2022. Some notable developments worth mentioning are the launch of digital bank services Maribank in Singapore, SeaBank in Indonesia and Philippines, and the award of a digital bank license in Malaysia.
With its existing financial services -- payments, credits, buy now, pay later, etc. -- and the recent launch of digital banking services, Sea Ltd is positioning itself as a serious player in Southeast Asia's growing digital financial service market.
So what does this mean for investors?
While Sea Ltd's recent financials are exciting, savvy investors know there's more to the story. The company needs to prove that its profitability is sustainable over the long term, and some unknowns could impact its future success.
But on a positive note, Sea's growing financial arm is a promising area for investors to watch. If this segment can sustain its momentum, it will soon become the third growth machine to support Sea's long-term growth plan.
Investors should closely track these two areas in the next few quarters to understand Sea's prospects in the coming years.
