Singapore Market

Sea Limited $SE – Blistering Growth and Losses in Check | Q2 2021 Earnings

Calvin Lo

Sea Limited (SE) just reported Q2 2021 earnings on 17th August 2021 (before market open). The company reported a rare revenue beat but EPS missed forecasts. Investors cheered the results, pushing SE to all-time highs intraday and closing at $318.61 on 18th August 2021.

Check out my previous articles on Sea Limited:

Earnings Highlights

  • Group:
    • Total GAAP revenue +159% YOY to $2.3B
    • Total gross profit +364% YOY to $931M
    • Total adjusted EBITDA loss -$24.1M vs +$7.7M last year
  • Digital Entertainment (DE): Every metric increasing, i.e. Bookings +65% YOY, Adj EBITDA +70% YOY, GAAP revenue +167% YOY, QAUs +45% YOY, QPU +85% YOY, Avg booking per user $1.6 vs $1.4 last year
    • Free Fire: Highest grossing mobile game in Southeast Asia, Latin America (both 8 consecutive qtrs) and India (3 consecutive qtrs), highest grossing mobile battle royale game in the US (2 consecutive qtr)
    • Esports: In May, finals of the Free Fire World Series 2021 Singapore hit a peak 5.4M concurrent online viewers
  • E-commerce (EC): More explosive growth, i.e. GAAP revenue +161% YOY, gross orders +127% YOY, GMV +88%, Adj EBITDA -$580M vs -314M last year, Adj EBITDA loss per order decreased 20% to $0.41
    • Shopee: Malaysia 2nd market after Taiwan to record positive adj EBITDA (before allocation of HQ common expenses), Top 2 ranking in Shopping category by downloads, average MAU and total time spent in app in Southeast Asia (in particular Indonesia), Taiwan, and Brazil
  • Digital Financial Services (DFS): Mobile wallet TPV >$4.1B +150% YOY
  • Guidance for FY21: Raised; DE bookings $4.5-4.7B +44% YOY, EC GAAP revenue $4.7-4.9B +122% YOY
  • Cash, cash equivalents, ST investments $5.6B; Operating cash flow positive $451M for 1H 2021; cash position decreased due to investing activities
  • New developments (from conference call transcript)
    • Launched Moonlight Blade Mobile, a MMORPG in Taiwan
    • Launched Pet Rumble within Free Fire – in-game virtual pets, designed to be highly social, deepening user and community engagement
    • Deployed Shopee Mall Brand Memberships across Southeast Asia and Taiwan – new customer management and retention tool for brands, brands can introduce their own loyalty programs within Shopee
    • Expanded partnership with Mastercard in Thailand, allowing users to pay at any of the 200K+ offline outlets that accept Mastercard Contactless

Growth Story Continues, Management Optimistic

Sea actually beat revenue forecasts this time and quite convincingly at that, after missing the past 3 quarters. Topline total group revenue is accelerating, even when compared to tough comps (i.e. comparing to Q2 2021 which benefitted from pandemic tailwinds for gaming and e-commerce).

Source: Investing.com

Management raised guidance for FY21 by $0.2B vs last quarter’s guidance for both DE bookings and EC GAAP revenue, which signals their confidence that growth will continue at a rapid pace. Based on this guidance, management also doesn’t seem to expect growth to slow down even with economies potentially reopening in coming months.

Personally, I agree with management’s view that the pandemic only served to accelerate digital adoption, thus providing a permanent boost to gaming and e-commerce. Gaming has gained in popularity and increased visibility during lockdowns. Gaming is no longer just a form of individual or multiplayer entertainment, but has become a form of mass entertainment in the case of e-sports, possibly replacing live sports for some. In the case of e-commerce, retailers have now been forced to get on platforms like Shopee to sell, and customers might have permanently moved to ordering online at least partially even post-pandemic. I know I have, especially for bulky and high usage items, e.g. diapers and milk powder….

Path to Profitability Emerging

The breakneck speed at which Sea’s e-commerce division has been growing revenue has come with rapidly widening losses on an adjusted EBITDA level. Sea doesn’t breakdown the net loss by division. Fortunately, the adjusted EBITDA for its gaming division has been growing almost just as fast and continues to bankroll both the e-commerce and the smaller fintech divisions.

Although Sea is still unprofitable, it appears to have its costs under control while still being able to grow exponentially. Losses on an operating and net level appears to be somewhat flattish (operating margin actually improved by 10% YOY, while net loss only increased by 10% YOY). These losses seem little changed when you consider that revenue and gross profit grew 167% YOY and 364% YOY respectively.

Besides that, Shopee Malaysia has finally turned positive on adjusted EBITDA basis, the second market after Taiwan to achieve this milestone. This gives us a hint that Sea might be making inroads towards profitability one market at a time.

I think the key developments to watch that might improve profitability are those that increase engagement and stickiness of its gaming platform, e-commerce marketplace, and mobile wallet offerings. Attracting and keeping users on their platforms and in their ecosystem is crucial to increasing revenues and improving margins.

Sea appears to be aware of this and there were no shortage of new products and services introductions that could help achieve this goal. E.g. In-game virtual pets Pet Rumble enhances the social element, Shopee Mall Brand Memberships could attract more brand loyalty from users, and the expanded partnership with Mastercard increases ability for users to transact making its mobile wallet more attractive.

My Thoughts

Overall, I’m very impressed. Sea is a company that is growing rapidly at this scale, dominating its markets, executing flawlessly, and making good progress towards profitability. All 3 of its divisions are in secular growth sectors and are firing on all cylinders. Management also shows great confidence that growth will not slow down even as we transition to a post-pandemic world.

Investors seem to recognize this as well and are pushing Sea’s stock price to lofty valuations. SE currently trades at a pricey 25x P/S. According to Tipranks, the average analyst price target is ~$342 which only represents a 6% upside. So, entering SE at these levels might be risky.

Source: Tipranks

In the short-term, valuations seem frothy to me, especially with the bump up post-earnings. I would probably wait for a pullback and consider adding to my position around the $255-285 range. With the Fed talking about tapering, who knows.

Source: TradingView

High growth companies like this need to be watched very closely for any signs of slowing growth or widening losses. Should Sea start to veer off the path to profitability, I’ll need to re-evaluate my thesis on the company. But until then, I still think this is one of the most promising growth companies with lots of runway ahead.

What do you think about Sea’s latest earnings results? Are you bullish or bearish on Sea?

Disclosure: I’m long SE

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