Wall Street’s sour reaction to Sea’s Q1 results: justified or short-sighted?

Sea Group’s results for the first quarter of 2023 were not well received by Wall Street. Shares of the NYSE-listed company fell 18% by the end of the trading day, following the release of its financial report and earnings call.

This was in stark contrast to the euphoric reaction to its Q4 2022 results that saw buyers send its stock 22% higher.

See also: Sea Group’s triple win: how it pulled off a stunning reversal

Why did these results alarm investors? Are they right to be worried?

Missed profit expectations

The company missed analysts’ profit estimates by over 60%.

Part of this was due to an impairment of US$118 million over a prior acquisition, but Sea didn’t identify the company.

Previously, Sea had announced the acquisitions of games developer Phoenix Labs, Indonesia’s Bank BKE, and an insurance company in Indonesia.

Impairments are usually a one-off event, so this should not affect the long-term value of a company.

But while the company’s revenue in Q1 was still up year on year, it was lower than in the previous two quarters.

In order to make sense of things, let’s dig deeper into each of Sea’s constituent businesses.

Garena – from model student to problem child

The main issue for Sea this quarter was Garena, its digital entertainment arm.

Revenue at Garena plunged by more than 50% year on year, which resulted in adjusted EBITDA falling to US$230 million – the lowest level since the first quarter of 2019.

Despite this drop, Garena’s adjusted EBITDA margin in Q1 2023 was the highest level in the past four quarters.

On the plus side, quarterly active users were up slightly at 492 million, following declines in the two previous quarters. According to the company, its blockbuster game Free Fire also achieved a new peak in monthly active users in the last eight-month period.

Forrest Li, Sea Group’s founder and CEO, highlighted that Garena’s second-largest game, Arena of Valor, had put in a “strong performance,” achieving a new peak in quarterly active users and bookings more than six years since its launch.

Shopee – average results, but high potential

SeaMoney – star of the quarter

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