Sea Limited (SE 0.05%) stock plunged by nearly 30% following its earnings report for the second quarter of 2023. Although revenue grew, the poor performance of its digital-entertainment segment and slowing e-commerce growth weighed on investors.
Nonetheless, Sea Limited has successfully turned what was a money-losing business into a profitable conglomerate. With two of its three segments continuing to post significant growth, investors should not give up on this company.
Sea's Q2 earnings
For Q2, Sea reported revenue of $3.1 billion, a 5% increase year over year. This included a 21% surge in e-commerce sales from its Shopee segment and a 54% revenue increase in digital-financial services, better known to the public as Sea Money.
Unfortunately for Sea Limited, a 41% revenue decline in the digital-entertainment segment weighed heavily on the company's performance. Digital entertainment, also known as its Garena gaming segment, has reeled as the end of lockdowns led to less interest in gaming.
Moreover, Free Fire, the most downloaded game between 2019 and 2021, has fallen in popularity since the pandemic. Free Fire reported a sequential increase in bookings during Q2, but no Garena game has emerged to match or surpass its numbers.
Furthermore, competitors such as Activision Blizzard and Tencent reported double-digit revenue increases for gaming in their most recent quarters. Garena was also Sea Limited's original business before the company expanded into e-commerce and fintech, a factor making Garena's poor performance difficult to comprehend.
Still, amid the disappointment, Sea reported a net income of $331 million, up from the $931 million loss in the year-ago quarter. A reduction in the cost of goods sold and lower spending on operating expenses led to the profit.
Making sense of the results
However, a positive net income was not enough to avert a sell-off in the stock. Consequently, it hovers near multiyear lows, a bottom that has led to a significant drop in its valuation. It now sells at a price-to-sales (P/S) ratio of less than 2 and a forward price-to-earnings (P/E) ratio of 20, levels that should price in the single-digit revenue growth rate.
Additionally, investors should remember that e-commerce and digital-financial services account for more than 82% of Q2 revenues. If Sea can address the revenue declines in digital entertainment, it could become a catalyst for a significant recovery.
Consider Sea Limited stock
Ultimately, the massive post-earnings sell-off in Sea looks like a buying opportunity. Admittedly, it needs to address the continuing declines in the digital-entertainment segment. Its performance has made the difference between modest and rapid growth for the Singapore-based conglomerate, indicating that it needs to make a Garena turnaround a priority or spin off the segment.
Nonetheless, its e-commerce arm reported revenue growth of more than 20% in a sluggish market. Moreover, the financial-services segment continues to grow at a rapid pace and is on the way to becoming a more meaningful part of the company. This should bode well for the entertainment stock in the coming quarters, regardless of what happens to Garena.
