Is Sea Limited Stock a buy it now?

Sea Limitedit is (SE -7.49%) Shares jumped 14% on May 17 after the Southeast Asian tech giant released its first-quarter earnings report. The company’s revenue rose 64% year over year to $2.9 billion, beating analyst estimates of $40 million. Its adjusted net loss, which excludes stock-based compensation, fell from $320 million to $445 million, or $0.80 per share, but still beat analysts’ expectations of 0.60. $.

Its adjusted earnings before interest, tax, depreciation and amortization (EBITDA) came in at negative $510 million, down from $88 million a year ago. Under generally accepted accounting principles (GAAP), its net loss fell from $442 million to $580 million.

Sea’s share price jumped after the report, but remains down more than 60% this year. Should investors expect this rebound to continue?

Shopee still grows like a weed

Sea’s e-commerce revenue, which comes from its online marketplace Shopee, grew 64% year-over-year to $1.5 billion. Its gross merchandise volume (GMV) increased 39% to $17.4 billion, while its gross orders soared 71% to $1.9 billion.

All three growth rates slowed, but were still impressive, compared to its triple-digit growth rates a year ago:

Data source: Sea Limited. YOY = year after year.

However, the segment’s adjusted EBITDA loss still fell from $413 million to $743 million, while Shopee’s adjusted EBITDA loss per order fell from $0.38 to $0.40.

Sea primarily attributed these growing losses to its corporate headquarters common expenses (headquarters costs), which are essentially the operating expenses it incurs in expanding its workforce, building new facilities and using cloud hosting services.

Excluding these headquarters costs, Shopee only suffered an adjusted EBITDA loss of $0.04 per order in its core markets (Southeast Asia and Taiwan), compared to $0.12 a year ago. . Its adjusted EBITDA loss of $1.52 per order in Brazil also represented a 45% improvement over last year.

Based on these improvements, Sea believes Shopee can achieve positive Adjusted EBITDA this year. after excluding head office costs. However, its adjusted EBITDA will likely remain in the red after including these expenses.

For the full year, Sea expects its e-commerce revenue to grow about 72%, compared to the segment’s 136% growth in 2021.

Garena’s growth continues to slow

Sea’s digital entertainment revenue, which comes from its video game publisher Garena, rose 45% year-over-year to $1.1 billion. However, its bookings – which more accurately reflect the underlying growth of video game companies – fell 27% to $0.8 billion. Its quarterly active users (QAU) also fell 5% to 615.9 million, while its quarterly paid users (QPU) fell 23% to 61.4 million.

Garena’s growth cooled as his best game Free fire – which launched in 2017 and became the world’s most downloaded game in 2019, 2020 and 2021, according to App Annie – has gradually lost momentum. The game was also unexpectedly banned in India earlier this year.

Data source: Sea Limited. YOY = year after year.

Free fire The downturn is a bright red flag for Sea, as he usually leverages Garena’s profits to offset Shopee’s losses. But in the first quarter, Garena’s adjusted EBITDA fell 40% year-over-year to $413 million.

Sea hasn’t given Garena any guidance, but its slowdown will likely continue unless it aggressively rolls out new games, reverses its ban in India, and locks in new users with Free Fire Myx, an enhanced version of the game for high-end devices.

Fintech segment losses stabilize

Finally, Sea’s oft-overlooked digital financial services segment, home to its Sea Money payments platform and other fintech services, continues to grow. The segment’s revenue jumped 360% year-over-year to $236 million, with its adjusted EBITDA loss dropping from $153 million to $125 million. Sea Money’s QAUs grew 78% year-over-year to 49 million, and its mobile wallet’s total payment volume (TPV) jumped 49% to $5.1 billion.

Sea Money’s ability to grow without racking up larger losses is encouraging, but this business is unlikely to achieve positive Adjusted EBITDA any time soon.

The sea must reduce its losses

Analysts expect Sea’s revenue to rise 35% to $13.5 billion this year, but expect its adjusted EBITDA loss to drop from $594 million to 2.1 billions of dollars. Sea’s stock may look cheap at three times this year’s sales, but investors are unlikely to pay a higher premium for the stock until it stabilizes Shopee’s adjusted EBITDA losses. after including its skyrocketing HQ costs.

Until that happens, other e-commerce stocks like MercadoLibre – which is growing at a similar rate to Sea but generating more stable earnings – are likely to be better overall investments.