Sea Earnings: Achieving Both Profitability and GMV Growth Will Be Challenging; Keep $70 Fair Value

We reiterate our fair value estimate of $70 after Sea SE reported first-quarter 2023 results that continued to show profitability but were overshadowed by an implied year-on-year decline in gross merchandise value that puts its long-term growth trajectory into question, in line with our thesis. We believe that profitability was attained at the expense of GMV decline, and this raises doubts about whether Sea can achieve both growth and profitability at the same time. A greater monetization rate contributed to profitability, along with a 60% year-on-year decline in sales and marketing expenses. While we are encouraged by the improvement, cuts to expenses and increases in monetization may not be feasible in the long term if GMV continues to decline. Our valuation assumes Sea can reach steady-state profitability while maintaining modest growth, but we believe there may be challenges in balancing both in the near term. This is compounded by long-term headwinds for Garena—we could see downward risks to Sea estimates if Garena continues to lose quarterly paying users, or if GMV growth remains muted. Given multiple risks to its business, we believe Sea’s upside is limited until it can show durable and profitable growth.

Overall revenue was $3.0 billion, reflecting a 5.0% year-on-year increase. Shopee reported revenue of $2.26 billion, reflecting a 51% increase year on year, driven by an estimated 40-basis-point sequential increase in monetization. The company no longer gives GMV data but indicated that GMV saw a similar trend in first-quarter 2022, when it declined 4% sequentially. This implies a 1% year-on-year GMV decline this quarter, consistent with Indonesian rival GoTo’s reported GMV decline of 4%. GoTo commented in its earnings call that it expects further GMV headwinds in second-quarter 2023, and therefore we believe muted GMV growth for Sea is possible as well. We estimate that Indonesia accounts for 35%-40% of Shopee’s GMV.