Analyst Note
| Kai Wang |We reiterate our fair value estimate of $70 after Sea 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.