Sea Limited’s E-Commerce and Fintech Strength Fuel Stock Surge

Key Points

• Sea Limited solidly beat analyst predictions on revenue but fell short on earnings per share for the second quarter.
• The firm noted strong performance in each of its three major divisions, with the digital financial services arm SeaMoney building solidly on both revenue and adjusted EBITDA.
• The company still faces a high cost of revenue, which negatively impacted net income performance last quarter.

Singapore-based e-commerce, gaming, and financial services company Sea Limited NYSE: SE added to its ongoing stock rally following an earnings beat on Tuesday, with shares almost doubling in the last year heading into the end of the week. All three of the firm's major businesses experienced sales growth and strong profitability, though the cost of revenue remains a factor impacting net income. With continued signs that subsidiary SeaMoney is gaining a foothold in the competitive digital finance space, Sea is a company to watch closely going forward.

Company-wide, revenue for the second quarter was $3.8 billion, a 23% improvement year-over-year, with gross profit up 9% to $1.6 billion. Adjusted EBITDA across all three business lines was $448.5 million, down slightly from $510 million in the prior-year quarter and shy of analyst estimates. Total net income fell to $79.9 million from $331 million this time last year.

E-Commerce Wing Dominates, Driving Revenue Performance

Shopee, Sea's e-commerce subsidiary serving the broader Southeast Asian market, posted revenue growth of 34% to $2.8 billion for the second quarter, beating estimates of $2.68 billion. This impressive growth was a healthy combination of core marketplace revenue, consisting of transaction-based fees, ad revenues, and sales of value-added logistics services.

The good news for Shopee doesn't stop there. Gross orders increased sharply by over 40% year-over-year, and gross merchandise value (GMV) climbed 29% to $23.3 billion.

Chairman and CEO Forrest Li said Sea expects Shopee to continue to thrive going forward. The company has upgraded its GMV forecast to mid-20% growth, up from the high teens. Li mentioned that Shopee is expected to achieve adjusted EBITDA positivity starting this quarter, following a reported EBITDA of negative $9.2 million in the second quarter, a significant change from $150.3 million a year earlier.

To be sure, Sea can take none of this success for granted. The Asian e-commerce space remains highly competitive, particularly after rival PDD Holdings Inc. NASDAQ: PDD recently posted strong results for its e-commerce platform Temu, and JD.com Inc. NASDAQ: JD also beat analyst expectations.

Sea also continues to face an issue with high revenue costs for its e-commerce business. For the second quarter, cost of revenue was $1.8 billion, up from $1.3 billion the year prior, due to increased logistics costs alongside higher order volumes. This contributed to the company-wide cost of revenue of $2.2 billion compared with $1.6 billion last year. Higher cost of revenue was among the primary factors impacting net income last quarter.

SeaMoney Growing Fast

While Sea's e-commerce wing is well-established, its financial services division is less so. The latest results should help to drive investor optimism in this area. Revenue surged by more than 21% to $519 million, and adjusted EBITDA climbed by 20.2% to $164.7 million.

Like Shopee, SeaMoney faces fierce competition. But Sea has prioritized growing this portion of its business, particularly when faltering post-pandemic e-commerce demand prompted the firm to make significant cuts to its headcount. With the most recent quarter's results, it seems SeaMoney has found a customer base and built some stability.

Gaming Division Remains Solid, Despite Lackluster Revenue Performance

Sea's digital entertainment and gaming platform, Garena, noted impressive bookings and user data for the second quarter. Bookings of almost $537 million were up 21% year-over-year, while quarterly active users climbed by 19%. More importantly, quarterly paying users increased by almost 22% over this period. The gaming arm is led by Free Fire, a popular mobile game that saw over 100 million active players every day in the quarter.

Sea Limited's issue in this space is translating the above interest into consistent revenue performance. Revenue for digital entertainment fell to $435.6 million from $529.4 million the year before despite increased user engagement. Sea attributed this to lower recognition of accumulated deferred revenue from prior quarters.

Sea's second quarter strengthened Shopee's position in the highly saturated Asian e-commerce space and helped buoy its rapidly growing financial services business. Still, the cost of revenue weighed heavily on net income for the quarter. To best capitalize on the increased attention from customers and appeal to investors, the firm will need to address this concern in future quarters.