Sea Earnings: Concerns Over Profitability Resurface As Growth Sputters; Fair Value Estimate Cut 23%

We are lowering our fair value estimate for Sea SE to $54 from $70 after the company reported second-quarter 2023 revenue of $3.1 billion that was 10% lower than our and consensus estimates. Not only did Sea miss revenue estimates but concerns over profitability resurfaced as the company indicated there could be periods of operating losses as it begins to focus on growth again. We believe Sea will again start ramping up subsidies and free shipping to defend its market share as a response to Lazada and ByteDance’s aggressive expansion into Southeast Asia. We previously reiterated that Sea will see challenges to achieving growth and profitability at the same time—however, there are now concerns over both metrics as we may see further losses, which is the main reason for our downgrade.

For the quarter, we estimate e-commerce monetization declined by 100 basis points while gross transactional value, or GTV, only grew slightly at 3%. While its GTV performance was not as severe as its peer GoTo’s reported 11% year-on-year decline, we believe it is very distant from previous consensus forecasts of double-digit growth in the short term. The stock dropped 29% on Aug 15 after earnings, and while we believe there are likely still near-term further risks, we believe the market has overreacted, given it showed positive operating margins for two quarters in a row, However, buyers may want to sit through the volatility before there is better visibility on long-term prospects given greater competition amid a growth slowdown. This result underpins our Very High Morningstar Uncertainty Rating on the stock.

We believe GTV growth will remain a foreseeable headwind given that competition is ramping up in the region, with competitors already publicly announcing plans to expand e-commerce operations. The lower monetization is also due to greater subsidies being used to compete for customers, which is likely to pressure both operating margins as well as net revenue.