Chart of the Week: Sea Shares Fall After Record Earnings

November 19, 2021

Sea Ltd stock Shopee

It’s understandable if investors are becoming jittery following the latest earnings season. There have been some blowout numbers among “growth” companies yet share prices have still fallen.

While the stocks of leaders in specific market niches continue to march higher, such as advanced semiconductor company NVIDIA Corporation (NASDAQ: NVDA), poor post-earnings share price performance can often be misleading.

That’s because the market tends to sell off on news which long-term investors shouldn’t be too concerned about. And, as a result, that inevitably creates opportunities.

One such opportunity presented itself earlier this week when Singapore-based, Southeast Asian gaming and e-commerce giant Sea Ltd (NYSE: SE) reported its third-quarter 2021 earnings on Tuesday (16 November).

Sea growth story continues

Sea shares have been on a tear over the past few years and that outperformance continued into 2021. Year-to-date, before earnings came out, Sea’s stock was up nearly 70%.

However, numbers that came out failed to sufficiently allay concerns surrounding slowing growth in some areas. As a result, Sea shares fell as much as 15% in the days following its earnings release.

While total GAAP revenue for Sea in the third quarter was up a whopping 121.8% year-on-year to US$2.7 billion, it was a sequential slowdown in gaming unit Garena that hit sentiment.

Garena, which operates wildly-popular game Free Fire, saw its quarterly active users (QAUs) rise by just under four million quarter-on-quarter, sharp slowdown from prior quarters’ growth.

Meanwhile, quarterly paying users (QPUs) – at 93.2 million – were flat sequentially in the third quarter. This can be partially explained by the launch of Free Fire Max, a more graphically-advanced and realistic version of its flagship game.

Monetisation for new users has been low, since it launched in September of this year, but as Garena ramps up the launch and ports over users to the new version this should pick up steam.

But what about Shopee? This was almost ignored by investors yet its fast-growing e-commerce arm saw GAAP revenue explode 134% year-on-year to US$1.5 billion.

Equally impressively, gross orders were up 123% to US$1.7 billion while gross merchandise value (GMV) from its marketplace was US$16.8 billion during the quarter, up 81% year-on-year (see below).

It’s proof that Shopee is continuing to embed itself into the thriving e-commerce ecosystem in Southeast Asia

Expanding into new geographies

Investors may also have been spooked by its bottom line, which saw its net loss balloon to US$572 million in the third quarter, up significantly from US$425 million in the same quarter of 2020.

However, the explanation behind this lies in Sea entering four new markets this year; India, Spain, Poland and France.

Beyond this, the company had US$11.8 billion in cash on its balance sheet at the end of the third quarter, after raising a US$6.3 billion in September to help fund growth.

Having successfully launched in Brazil in 2019, using its existing loyal Free Fire user base in the country, Shopee has since become one of the top-downloaded shopping apps.

So, with a long runway still ahead of it for e-commerce – not only in Southeast Asia but in other new markets too – and sufficient cash, the structural growth story of Sea remains firmly intact.

Source: Sea Ltd Q3 2021 earnings presentation

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips owns shares of Sea Ltd.

Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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