KEY POINTS
- Sea's third-quarter earnings report was similar to recent results.
- But management is making a pivot toward achieving profitability.
- The stock is attractive for patient believers in Sea's long-term potential.
Sea Limited has been a winning investment since its debut on the public markets in 2017, returning 229% compared to the S&P 500's 57%. It has also been a volatile stock, and large price swings have not been uncommon.
In a recent example, Sea's Q3 of 2022 delighted Wall Street and shares popped 36% the day after the report. Even with some backsliding in the days since, the stock is still up 17% post-earnings.
For investors who have been considering buying shares, this sudden share price appreciation may make it seem like the opportunity has been missed. I don't believe that's the case at all. Let's dig in and see why.
Taking the long view
The recent price pop may be intimidating to investors considering buying shares, but a step back shows that even with the post-earnings jump, Sea Limited has had a rough go of it recently.
SE data by YCharts
As this chart shows, while Sea has beaten the market over the long term, it's been a wild ride and shares are down drastically since late 2021. In fact, as of this writing, Sea's stock is down 85% off its high. It's important to understand that this drop includes the recent stock pop.
But how has the business done?
Sea Limited operates in three segments, and put simply the company is the preeminent gaming, e-commerce, and fintech company in Southeast Asia. During the market bull run that followed the COVID-19 crash of early 2020, Sea caught investors' attention with its regular triple-digit revenue growth, which helped drive the parabolic share appreciation.
However, at the same time, Sea was unprofitable and mostly free-cash-flow negative. While this is not uncommon for businesses that are in growth mode, the market began to sour on Sea once the revenue growth slowed.
What's interesting about the recently reported Q3 is that the results weren't overly impressive. Revenue increased 17% year over year and the net loss was $569 million, a slight improvement from a loss of $573 million in Q3 of 2021.
In fact, while revenue has grown, Sea has seen increasing net losses and continued cash burn over the past three years. The fact that this quarter caused such a share jump is curious considering the report was essentially more of the same.
SE Revenue (TTM) data by YCharts
Is the earning jump a signal or noise?
So what caused the pop after earnings? Part of the reaction was likely that the company beat analyst guidance on the top and bottom lines, but more likely it was due to management's commentary on the earnings call.
As mentioned above, Sea hasn't made any meaningful progress toward profitability despite impressive revenue growth over several years. According to Sea's CEO Forrest Li, that could change in the coming quarters.
Citing the changing macroeconomic environment and his company's need to adapt in order to survive, Li said, "We have entirely shifted our mindset and focus from growth, to achieving self-sufficiency and profitability as soon as possible without relying on any external funding."
While no definite timelines were provided by management, there have been reports of layoffs over the past six months, and the management team will be forgoing salaries until the company reaches self-sufficiency.
Is Sea a buy right now?
For investors who believe in the long-term potential of Sea's business segments, a focus on profitability could be good news for long-term shareholder returns. Additionally, from a valuation standpoint, now could be a great time to buy shares and see if that thesis plays out. Sea's current price-to-sales ratio is 2.5, only slightly above its all-time low of 1.9. That said, the path to profitability could take some time, so it may be worth giving Sea several quarters to prove it can walk the walk.
Bottom line, the recent 36% stock jump should not play into any investor's decision about buying shares. Any investing decision should be made based on Sea' future potential and the price paid relative to that potential.