Sea Limited: Profitability may be around the corner (NYSE: SE)

Shopee Food express delivery person on a motorbike

Just take a look

investment thesis

sea ​​ltd (New York Stock Exchange: SE) has come under a lot of scrutiny in the past couple of years as the shift in focus from growth to profitability and overall headwinds have resulted in a massive drop in growth across Shopee and Garena units. While this is unfortunate, management has so far executed adroitly to transform the company into an increasingly self-sustaining business in the near term.

In this article, I attempt to dig deeper into Q3 2022 results and provide a comprehensive earnings analysis. Although I would like to point out that management has explicitly stated that growth can accelerate again after achieving profitability and that they have sufficient cash reserves to pay off the convertible notes that are on the balance sheet.


Garena Active Users and Quarterly Paying Users

SE 10-Q

Garena's adjusted EBITDA margin

SE 10-Q

Garena’s QAU and QPU continued to decline sequentially, as management’s expectations for the stability of its user base were not met. The overall headwind continues to be a headache, and it looks like more uncertainty awaits Garena Free Fire. The main one is focusing on releasing new games, with games like Primitive Era and Black Clover Mobile launching recently. While this suggests that management is working hard to accelerate Garena’s growth, it’s important to realize that gaming success isn’t guaranteed, and that’s the biggest uncertainty for the business. As a result, this caused our adjusted EBITDA margin to drop to 32.5% for the quarter.

In addition, management states that the termination of the agreement with Riot Games will have no impact on Garena’s publishing business, and Garena is looking for other game developers to best their publishing business.


The total value of Shopee merchandise

SE 10-Q

The number of Shopee's orders

SE 10-Q

Shopee’s GMV grew 14% year-over-year, and the number of orders grew 18% year-over-year, which is a steady decline in the past two quarters. This is a result of management rolling back sales and marketing (“S&M”) expenditures, exiting multiple markets, significant cost cutting (such as hiring), and finally, lower consumer discretionary spending. This is in contrast to Lazada (NYSE:BABA), where the number of orders is down year-over-year and it also prioritizes profitability by increasing its monetization.

While this shows that consumers continue to spend on Shopee in SEA, the GMV and number of orders were contributed in part by Shopee Brazil. In a challenging macro environment, Shopee has seen 36% year-on-year growth in the number of brands on the platform, indicating that Shopee is an increasingly important partner in growing its online revenue.

Shopee's total adjusted EBITDA loss per order

SE 10-Q

The most important part is Shopee’s improvement in profitability. Total adjusted EBITDA loss per order continues to improve 23.5% sequentially, more specifically, Shopee Brazil’s loss per order improved 27.5% sequentially during the quarter compared to 6.6% last quarter. Furthermore, Shopee is expected to achieve profitability by FY23 instead of FY25 as previously guided by management. This shows that management has made great strides in the pursuit of profitability, which is impressive from my point of view. Once self-sustaining is achieved, growth can accelerate again, although management expects flat or negative growth in some metrics in the near term.

C Bank

Note that I will be using “SeaBank” and “SeaMoney” interchangeably.

SeaMoney loan receivables

SE 10-Q

SeaMoney loans receivable grew 46% from fourth quarter ’21 and 110% from third quarter ’21 to $2.2 billion. These are loans to customers where SeaMoney generates revenue by charging interest rates, and it’s growing rapidly. In my previous article, I explained that in September 2022, SeaBank Indonesia increased its customer loans and deposits by 111% year-on-year and 147% annually, respectively, and launched ShopeePay in Brazil. During the earnings call, management stated that the credit business is profitable and cash flow is positive, and it will focus on growing this business in Southeast Asia (“SEA”) and Brazil.

In addition, they also said to diversify their funding sources for the credit business, which I believe is seeking third party funding partners to reduce the capital required for the business while at the same time reducing credit risk. Similar to Bank Jago (IDX: ARTO), SeaBank may use its partners’ data to help improve non-performing loans and expand lending. Readers unaware of SeaBank’s business model can head off to take a deep dive into the company.

SeaMoney revenue

SE 10-Q

Marine money revenue as a percentage of total revenue

SE 10-Q

SeaMoney's adjusted EBITDA margin

SE 10-Q

As a result of growing deposit and loan books, its revenue for the third quarter of 2022 grew 147% year-over-year, and increasingly makes up a larger portion of its total revenue by 10.4% this quarter. Management was also intentional in reducing S&M expenses, and along with accelerating revenue growth, adjusted EBITDA margin improved significantly to -20.7% for the quarter. This compares to -40% in the second quarter of ’22 and -120.3% a year ago.

Sufficient cash reserves to pay off convertible notes

Limited cash balance on the sea and cash burn rate

SE 10-Q

One of the biggest concerns about Sea Limited for investors is its cash burn rate, as they fear the company doesn’t have enough cash reserves to pay off convertible notes due in 2026. However, cash flow didn’t just slow in the third quarter of 2022. However, management also hinted that there were enough cash reserves to pay off the convertible notes:

“We aim to continue to maintain a net cash position, after budgeting for full cash retirement of existing convertible notes assuming no external financing.”


Overall, this was a very decent quarter for Sea Limited, as we can see that they’ve made significant improvements on the way to profitability, especially for Shopee. While that comes with a growth trade-off, management has indicated that Shopee can re-accelerate its growth after achieving profitability in FY23, which was pulled from FY25 as previously directed.

Garena’s results remain a concern as the macro appears to be having a longer-than-expected impact on its user base, and as a result its profitability has been trending downward over the past couple of quarters. The management is working hard on its game pipelines, although the uncertainty lies in the success of these new games and whether they can accelerate their growth in the future.

SeaBank has been growing its top line very quickly and huge improvements have been made to the bottom line as well. Furthermore, the total credit business is profitable and generates positive cash flows, making up an increasingly larger percentage of its total revenue. I still think this could be a potential growth driver for Sea Limited.

What are your thoughts on the quarter? Let me know in the comment section below!

Editor’s note: This article discusses one or more securities that are not traded on a major US stock exchange. Please be aware of the risks associated with these stocks.