Sea Ltd. stock jumps by 40% as painful company cuts improve Q3 results, lower losses

Disclaimer: Opinions expressed below belong solely to the author and do not constitute financial advice.

Businesses are a lot like bodybuilders. After a growth phase — “bulking” up — comes a time for cuts and removing the excess fat, even if it’s not a pleasant process. But, as they say: no pain, no gain.

Sea Ltd. stock gained up to 40 per cent yesterday before closing at +36 per cent after some investors realised their profits (which would be excellent for an entire year, let alone just a few hours of trading).

The jump is a result of better than expected quarterly report which saw higher sales and lower losses than anticipated by analysts.

In the three months ending September 30, Sea lost an adjusted 66 cents per share on US$3.2 billion in sales, compared to expectations of an adjusted loss of 99 cents per share on US$3.01 billion in sales.

Bumpy road ahead

Sea is not out of the woods yet, of course, as it still lost more than half a billion dollars in the quarter alone — about as much as last year — but it’s clear that the cuts are taking effect and may keep improving performance further as the company is busy trimming unprofitable investments, marketing expenditures (down by 20 per cent) and its workforce (laying off about 10 per cent of its headcount in the past six months).

Similarly, while the latest report beat expectations the outlook for 2023 is still quite grim, given the fears of recession which would certainly reduce consumer spending and bring growth of company’s e-commerce business, Shopee, to a halt.

Even though it posted a still very healthy 50 per cent jump in revenue versus 2021, it is still far below the lofty expectations at the beginning of 2022, when company’s guidance for the year was around US$9 billion.

At the current rate, however, e-commerce revenue is bound to top out around just US$7.5 billion.

Meanwhile, revenue for the entire group increased by “only” 17 per cent year-on-year — down from 29 per cent last quarter.

The moneymaking Garena continues to face headwinds with lower bookings and falling profits, while financial services, despite growing rapidly (revenue up by 147.2 per cent) are still too small to make a meaningful contribution to company’s overall performance (yet).

Dwindling money reserves

Given the US$570 million loss, Sea’s reserves took another hit this quarter, dropping to US$7.3 billion — a decline of over US$1.5 billion for the year to date, and a concerning US$4.5 billion compared to Q3 of 2021.

This, in fact, was the main driver of the company-wide cuts as it was clear the end of its financial runway was approaching quickly and raising more money in current economic conditions was out of the question.

Still, with the management’s commitment to profitability and anticipated end to rapid money loss next year, it doesn’t seem bankruptcy is a realistic threat, which made Sea’s stock so attractive yesterday. It’s unlikely to turn into a stronger rally, though, given the wildly unpredictable year ahead.

“Better than expected” results don’t necessarily mean “great”, after all.

Featured Image Credit: Michael Petraeus