What Should Investors Know Ahead of Sea's Earnings?

Sea reported record-high revenue for the first quarter of the fiscal year 2024, driven by strong e-commerce transactions, indicating that the company is successfully navigating intense competition from newcomers like TikTok, owned by China's ByteDance. The NYSE-listed company announced that its revenue for the January-March period reached $3.73 billion, a 23% year-on-year increase. Within the company's divisions, e-commerce business Shopee experienced a revenue growth of 31%, reaching a record high of $2.95 billion, driven by investments in live-streaming features and logistics networks, resulting in the highest quarterly orders.

However, the technology group reported a net loss of $23 million for the quarter, compared to a net income of $87 million in the same period last year. Total operating expenses, including sales and marketing costs, increased by 15% to $1.48 billion, while the group also incurred non-operating investment losses of $111 million. The company did not disclose specific investment details. However, on a quarterly basis, the net loss for the e-commerce and online gaming divisions narrowed by approximately 80% compared to the loss of $111 million in the October-December period last year.

Analysts have mixed expectations for Sea Limited's e-commerce performance in Q2 FY24. While Citi maintains a Buy rating with a slightly lowered price target, expecting in-line results for Shopee, JPMorgan has a more cautious stance. They have initiated a "Negative Catalyst Watch" due to high investor expectations and concerns over Shopee's continued investments in logistics in Asia and expansion in Brazil, which may lead to an adjusted EBITDA surprise on the downside. According to DBS Bank, there is an anticipated slowdown in e-commerce gross merchandise value (GMV) growth due to a broader retail slowdown, increased take-rates, and lower promotions, with projections of 15% GMV growth in FY24 and 10% in FY25.

Forrest Li, Sea's Chairman and Chief Executive Officer reinforces the optimistic outlook for e-commerce, reporting that Shopee has seen considerable expansion this quarter, setting new records in terms of orders, GMV, and revenue. He attributes much of this success to Shopee's integrated logistics infrastructure, emphasizing the efficiency and reach of SPX Express. This logistics arm is now recognized as one of the most rapid and expansive in the company's operational regions, significantly elevating the shopping experience for customers.

Digital financial services revenue and operating income are primarily attributed to the consumer and SME credit business. Mr Li said, "SeaMoney has continued its strong growth momentum and profitability into 2024 while maintaining prudent risk management.”

Commenting on future growth, Mr Li said, "We anticipate further growth for our digital financial services business throughout the year. As we healthily grow our user base, we will be able to offer a broader set of financial services to meet our users' needs in the future.”

For Sea Limited's digital entertainment segment, specifically Garena, Citi expects solid results in Q2. Similarly, BofA predicts that Garena will sustain its trends, contributing to a stable set of Q2 numbers for Sea Limited. Echoing this sentiment, Mr. Li expressed satisfaction with Garena's return to growth, primarily driven by the robust performance of Free Fire across various regions. Discussing the impact of Free Fire, Mr. Li highlighted the game's sustained global presence as one of the top mobile games in terms of user base, even in its seventh year. Its enduring ability to draw in new players reinforces the company's confidence in developing Free Fire into a perennially popular franchise.

Citi lowered the firm's price target on Sea Limited to $80 from $81 and keeps a Buy rating on the shares. The analyst expects the company to report in-line results for Shopee and solid results for Garena in Q2.

JPMorgan lowered the firm's price target on Sea Limited to $66 from $78 and keeps a Neutral rating on the shares. The analyst also opened a "Negative Catalyst Watch" on the shares ahead of the Q2 report. The stock has gained 96% since the lows in January and conversations with investors indicate elevated e-commerce expectations into the quarter, the analyst tells investors in a research note. The firm believes Sea's e-commerce adjusted EBITDA could surprise negatively due to continued investments by Shopee in logistics in Asia and in the overall marketplace in Brazil. Hence it believes the August results could be a negative catalyst for the stock.

BofA raised the firm's price target on Sea Limited to $77 from $75 and keeps a Buy rating on the shares. The firm expects Sea to report "a stable set of 2Q numbers," with losses in Shopee reducing and Garena trends sustaining. BofA estimates revenue of $3.8B, implying a 23% increase, and forecasts the company to report a positive net income of $25M in Q2, the analyst tells investors in a preview note.

DBS Bank downgraded Sea Limited to Hold from Buy with a price target of $75, down from $96. The firm is projecting slower e-commerce gross merchandise value, or GMV, growth at Sea Limited amid a broader retail slowdown in the region due to rising take-rate and lower promotions, forecasting its GMV at 15% in FY24 and 10% in FY25 - down from prior estimates of 27% and 16% respectively, the analyst tells investors in a research note. DBS also believes that Sea will prioritize profitability over market share.