What happened
Shares of Sea Limited (SE 0.05%) were down 28% at 12:04 p.m. ET on Tuesday after the e-commerce and digital entertainment provider reported lower revenue than analysts had expected.
While the company showed significant improvement in profitability, the digital entertainment business reported weak financial results that weighed on the stock's performance.
So what
While management reported that its popular Free Fire mobile game grew active users and paying users quarter over quarter, Sea didn't translate the growth in users to higher top-line growth in the digital entertainment segment, where bookings fell 4% over the previous quarter.
Another highlight of the quarter was the significant improvement in margins at the Shopee e-commerce business. This pushed Sea's net profit to $331 million across the business, up from a loss of $931 million last year.
Now what
While Sea benefited from strengthening trends in the economy, with inflation not affecting consumer spending as much as last year, management warned of potential lumpiness in quarter-to-quarter results as it ramps up investment in the e-commerce business.
From a long-term perspective, Sea's e-commerce business is in good shape. It's also seeing robust growth from SeaMoney, its digital financial services business. The higher margins are allowing the company to invest more in e-commerce growth, which management views as a competitive advantage.
Overall, the weak performance from digital entertainment may continue to weigh on the stock. Management is working on building lasting engagement with users and bringing new games to market, but investors have noticed a steep fall in the company's digital entertainment bookings over the last year, which needs to turn around to support the stock's valuation.
