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Sea (NYSE:SE) Exceeds Q3 Expectations But Stock Drops 11.4%

StockStory - Tue Nov 14, 2023

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E-commerce and gaming company Sea (NYSE:SE) reported Q3 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 4.9% year on year to $3.31 billion. Turning to EPS, Sea made a GAAP loss of $0.26 per share, improving from its loss of $1.02 per share in the same quarter last year.

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Sea (SE) Q3 FY2023 Highlights:

  • Revenue: $3.31 billion vs analyst estimates of $3.21 billion (3.1% beat)
  • Adj. EBITDA: $35.3 million vs. analyst estimates of $179.8 million (large miss, as the company said it is currently prioritizing growth and market share over profits)
  • EPS: -$0.26 vs analyst estimates of $0 (-$0.26 miss)
  • Free Cash Flow of $599.8 million, similar to the previous quarter
  • Gross Margin (GAAP): 43.5%, up from 38.9% in the same quarter last year
  • Quarterly paying users: 40.5 million, down 11 million year on year (miss vs, expectations of 44 million)

“Our strategy for e-commerce is driven by the principle that maximizing the long-term profitability of the business will generate the greatest returns to our shareholders in the long run,” said Forrest Li, Sea’s Chairman and Group Chief Executive Officer.

Founded in 2009 and a publicly-traded company since 2017, Sea (NYSE:SE) started as a gaming platform and has since expanded to offer a variety of services such as e-commerce, digital payments, and financial services across Southeast Asia.

Online Marketplace

Marketplaces have existed for centuries. Where once it was a main street in a small town or a mall in the suburbs, sellers benefitted from proximity to one another because they could draw customers by offering convenience and selection. Today, a myriad of online marketplaces fulfill that same role, aggregating large customer bases, which attracts commission-paying sellers, generating flywheel scale effects that feed back into further customer acquisition.

Sales Growth

Sea's revenue growth over the last three years has been incredible, averaging 63.9% annually. This quarter, Sea beat analysts' estimates but reported lacklustre 4.9% year-on-year revenue growth.

Sea Total Revenue

Ahead of the earnings results, analysts were projecting sales to grow 5.8% over the next 12 months.

Our recent pick has been a big winner, and the stock is up more than 2,000% since the IPO a decade ago. If you didn’t buy then, you have another chance today. The business is much less risky now than it was in the years after going public. The company is a clear market leader in a huge, growing $200 billion market. Its $7 billion of revenue only scratches the surface. Its products are mission critical. Virtually no customers ever left the company. You can find it on our platform for free.

Usage Growth

As an online marketplace, Sea generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.

Sea has been struggling to grow its users, a key performance metric for the company. Over the last two years, its users have declined 28.5% annually to 40.5 million. This is one of the lowest rates of growth in the consumer internet sector.

Sea Quarterly paying users

In Q3, Sea's users decreased by 11 million, a 21.4% drop since last year.

Key Takeaways from Sea's Q3 Results

Sporting a market capitalization of $26.09 billion, more than $7.50 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Sea is attractively positioned to invest in growth.

It was great to see Sea beat analysts' revenue expectations this quarter. That stood out as a positive in these results. On the other hand, its user base fell, missing expectations. The company also stated that they will "prioritize investing in the business to increase our market share and further strengthen our market leadership", which is having a negative impact on profits. As a result, adjusted EBITDA missed by a large amount. Overall, the results could have been better. The company is down 11.4% on the results and currently trades at $40.8 per share.

Sea may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.

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The author has no position in any of the stocks mentioned in this report.