The global economy has grappled with surging inflation and rising interest rates for the past 18 months, and consumers have borne the brunt of the impact. Everyday goods and services have relentlessly increased in price, as have the size of mortgage payments.

The knock-on effects have hit companies reliant on consumer spending, and Sea Limited (SE 1.20%) is among them. Investors have sent its stock price plunging 80% from its all-time high, but its financial results for the first quarter of 2023 offered a few reasons to be optimistic about the future.

Sea Limited's largest segment continues to grow nicely, and the company has transitioned to profitability, which is a big green flag for investors. Here's why its stock is a buy right now.

Sea Limited is a triple threat

The digital economy continues to expand as consumers demand more convenience from their shopping, entertainment, and even financial services experiences. Sea Limited covers all three:

  • E-commerce: Sea Limited's Shopee platform is a hybrid consumer-to-consumer and business-to-consumer ecosystem. It's one of the most popular e-commerce apps in Southeast Asia, and has a rapidly growing presence in Latin America. In Q1, it generated $2.1 billion in revenue, which was a 36% increase year over year.
  • Digital entertainment: This is led by Sea Limited's Garena game development studio. It's responsible for the Free Fire battle royale mobile game that has been downloaded more than 1 billion times. But the segment is struggling to maintain its pandemic-era numbers as consumers spend less time at home, and in Q1 it saw declines in active users and paying users, as well as a whopping 43% plunge in revenue.
  • Digital financial services: This is the company's smallest segment, and it's led by the Sea Money brand, which provides digital payments and banking services to the Southeast Asia region. It produced $413 million in revenue during the quarter, which equaled growth of 75%, bolstered by key integrations with the Shopee platform.

The sluggish result in Sea Limited's gaming division was a real drag on the company's overall performance. Its total revenue grew by just 4.9% year over year to $3 billion. In comparison, during the year-ago period, total revenue surged by 64%.

There's another, more positive reason Sea Limited's growth slowed

The difficult economic environment has prompted investors to sell their shares in companies that are consistently generating net losses because they're perceived as riskier during a time when it's very hard to access fresh capital. That's a big reason Sea Limited stock is down 80% from its all-time high, but the tide might be turning.

The company delivered a surprise profit of $422 million in Q4 2022, and it just followed that up with net income of $87 million in the first quarter. It has been slashing operating costs to get there, laying off more than 7,000 staff and reducing its marketing spend by a whopping 60%. 

While it's great news that Sea Limited is now profitable, investing less money in areas like marketing tends to result in slower revenue growth because its products and services are reaching fewer potential buyers. 

But an economic recovery could offset that

Here's what we know right now: Sea Limited is profitable, so owning its stock is a less risky proposition, but the company is growing more slowly, which means investors won't pay as high a price for it.

But we also know that inflation is rapidly declining at the moment across most major economies, and many market strategists are predicting the U.S. Federal Reserve will actually begin cutting interest rates this year. A combination of those things could reignite consumer spending. 

There's no guarantee its gaming segment will come roaring back because it's also affected by a shift in socioeconomic conditions (like the end of pandemic lockdowns and social restrictions). But its revenue and quarterly active users are quickly falling back to 2019 levels, which indicates a bottom might be near, and therefore, a return to growth could be around the corner.

Investors should picture a scenario where 12 months from now, Sea Limited continues to maintain profitability but also experiences a boost to its overall revenue growth led by Shopee, thanks to improving economic conditions. The end result could be a lightning-fast growth rate in the company's earnings on the back of its leaner cost structure.

The 80% decline in Sea Limited stock from its all-time high means it's trading near its cheapest valuation on record, with a price-to-sales ratio of 3.1 as of this writing, which is 86% off its peak of 22.9. As a result, this could be a chance for investors to buy in at a rock-bottom price, potentially producing strong returns over the next few years.