Sea Limited (NYSE: SE) was the stock darling for hypergrowth investors back then.
Triple-digit topline growths for topline and gross merchandise value, and a profitable gaming arm, it seems like nothing could go wrong.
It was the stock that Singaporeans or Asians who were finding the next diamond in the rough.
Heck, even I believed it.
But how tides turned when the interest rate regime switched. Decelerating growth rates, and gaping losses have seen the stock tanked by more than 80%.
But its latest set of results seems to provide an uplift to share prices, as it has achieved its first profitable fiscal year.
So has the stock bottomed and is it time to go in?
Chuck topline growth out, welcome profitability
Sea’s FY’23 revenue growth was just a mere +5% YoY. This would cause the stock to tank if it were still back then.
But in an environment where profitability is in the limelight, Sea seems to have ticked the box with its maiden profitable fiscal year. Net income came in at USD 162.7 million, from a loss of USD 1.7 billion previous fiscal year.
The best part? FY 2024 looks to be another profitable year for Sea as well, as per CEO Forrest Li’s statements.
Growing cash pile
Back then when Sea was a cash-eating but rapidly growing company, showing the cash pile always provided me a sense of security that the company would not burn through their pocket in the quest for growth with no bounds.
It switched to a cost-cutting mode in 2022, but in August 2023, has pivoted back to growth mode, to maintain its market share and try to grow in a more congested space.
The narrative has changed. Cash is still king, but what would Sea do to solidify its standing, continue to innovate, and grow, while not slipping back to losses, would be the focus.
Hello Shopee, Bye Garena?
The thesis for Sea back then was that so long as Garena was growing, raking in cash, and earnings were then reinvested into a growing e-commerce arm, Sea looked like a no-brainer.
Today, Shopee has grown so much that it is the main revenue generator of Sea. However, when it boils down to operating profitability, Shopee is still a whisker away from being in the black.
Garena is still pulling the strings in terms of operating profitability, together with Digital Financial Services which is also in the black.
In terms of maintaining or even growing operating profitability, E-commerce would need to start being operationally profitable, together with an increase in Digital Financial Services.
Digital Entertainment is seeing another drop in its operating income. In the gaming world, interests and focus change very quickly. A great gaming company or business can push out new games that can keep its user base entertained and inclined to make micro-transactions.
This does not seem the be the case for Garena, with flattish bookings, a dip in QAU, and a flattening paying-user ratio.
What are the next theses for Sea?
If I am being honest, Sea’s future is still just as vague as ever.
The immediate growth and focus would be E-commerce, which looks to be growing well. With Digital Financial Services complementing E-commerce, both should do well and play a pivotal part in Sea’s prospects.
On the flip side, Digital Entertainment looks to be a liability in the making. The gaming arm does not look like a full-fledged gaming business in the likes of Electronic Arts Inc (NASDAQ: EA) and TAKE-TWO INTERACTIVE SOFTWARE, INC Common Stock (NASDAQ: TTWO).
Even Microsoft will look more like a proper gaming company with Activision Blizzard Inc under its belt.
Digital Entertainment and E-commerce swapped places as the assets and liabilities of the company.
Closing remarks
I believe the worst is now behind for Sea. E-commerce and Digital Financial Services should continue to grow. Southeast Asia is its territory, with a seemingly narrow moat.
If I need to shop online for some random stuff, I would go with Shopee. I think the same applies to Lazada users, but the gist is, most of us don’t really compare that much for trivial purchases.
But with Sea now only focusing in just Taiwan and South East Asia (pun not intended), it looks like geographical expansion is unlikely.
There were initiatives back then to enter Eastern Europe and the Americas, but nothing fruitful came about.
On the flip side, Temu by PDD Holdings (NASDAQ: PDD) making it big in the US, does raise one of my eyebrows on how Sea planned their expansion.
Not a clear and easy stock that one can easily profit from, if you ask for my honest opinion. In fact, I might be looking to dispose of my stake and focus the capital elsewhere.
