Earnings Review of Sea Limited (2022Q2) - 16 Aug 2022 - should we buy at discount or wait a while more?

Let us look the 2022 Q2 earnings of SEA LIMITED $SE (dated 16th Aug 2022).

Sea has the following service offerings:

• E-Commerce
• Digital Entertainment
• Digital Financial Services

Yahoo Finance overview of Sea as of 21Aug22

Background

• 52-week low & high of 54.06 & 372.70
• the last closed price stood at $67.67 (as of 19 Aug 2022)
• The market cap of the company is $38.013B
• The average volume trading volume of the stock is 6.385M
• On the last day of the week (19 Aug 22), the trading volume stood at 11.22M following days of sell off following the disappointing earnings.

Financial results (Q2 2021 vs Q2 2022)

Observations (Q2 2021 vs Q2 2022):

• Overall revenue has increased 29.0% > this is good news.
• Coming to the revenue, we have the following:
• Concern that the "digital entertainment (that includes the gaming core) has fallen by 12.1%
• It is good to see the great growth in e-commerce & others has grown by 75.6%
• Sales of Goods has grown by 11.7%
• However, if we look into the costs of revenue, we have some observations:
• the costs of service for Digital entertainment has dropped by 11.0% but the drop in revenue is more at 12.1%.  However, there is still a good gross profit margin from this at $639.729M (71.06%) for Q2 2022 a slight drop compared to 71.42% for Q2 2021.
• For e-commerce and others, there is a growth of cost of revenue of 62.8% that is less than the 75.6% growth in revenue for the same period.
• For sales of goods, we see a growth in the costs (of goods sold) at 9.1% that is lesser than the 11.7% 
• From the above, we still see a healthy 17.1% increase in terms of Gross profits comparing the 2 quarters.
• Thus, we have improved gross profits comparing the 2 periods.
• The area of concerns for me lie in the operating expenses:
• Sales and marketing expenses grew by 5.7%
• General and administrative expenses grew by 95.9%
• Research and development expenses grew by 115.0%
• There is also a goodwill impairment of $177.28M
• The total operating expenses grew 52.3%
• If we compare the growth of revenue (29.0%) to the growth of total operating expenses (52.3%), we notice that we are incurring much more expenses with the revenue growth.  
• Thus, it is not surprising that the operating loss grew 150.5% from $334M to $836M.
• Even if we remove the $177M from goodwill impairment.  The loss will stand at $659M, still a 97%.
• Despite the revenue growth of 29.0%, the net loss grew by 114.7%.  This is not acceptable
• Shares dilution from 519M (31 Dec 2021) to 556M (30 Jun 2022).  This is an increase of 7.1% shares

• For the share based compensation, it grew from 112M to 184M, a growth of 63.6%.  Comparing this to the growth of revenue at 29%, the share based compensation looks to be "overweight".

Balance Sheet

From the balance sheet (ending 30 June 2022 in comparison to 31 Dec 2021), we have the following observations:

• There is a drop in total assets from $18.7B to $17.4B and an increase in the total assets from $11.3B to $12.0B
• The cash and equivalent on hand is not enough to cover the total current liability but the total current assets of $12.9B is still more than total current liabilities at $6.7B.
• The total accumulated deficit has increased from $7.2B to $8.6B (this is an increase of $1.4B in 6 months) - a red flag.
• Thus, the path forward will be for the company to take on more loan and issue more shares.  Shares dilution is never a good thing.
• There is also an increase of net inventories of almost $10M.  Inventories can be an area of concern especially if they are unable to "sell" their products.  In this case, we are unable to ascertain if these are mostly current inventory.  If most of the inventory is aged, then, this meant that their forecast, production and sales are not doing as well.
• Notable concern: 
• Increased of liability (convertible notes) by $700M
• Accounts Payable increased by $25M
• Accrued expenses and other payable increased by $308M
• Operating lease liabilities increased by $244M
• Goodwill dropped by $144M
• Net property and equipment increased by over $250M
• Net operating right of use increased by $288M
• Long term investments increased by  $208M

Cashflow statement

Observations from cashflow statements (for 6 months ending 30 Jun, 2021 vs 2022):

• Net cash from operating activities went from $450M to negative $1,209M
• Increase in the net cash used for investing from $1,649M to $2,078M
• Increase in the net cash generated for financing from $180M to $439M
• For period ending 30 Jun, thus, the net decrease in cash, cash equivalent and restricted cash went from $1,050M to $2,975M. 

Conclusion

Despite the increase in revenue, the company suffered even more losses from their operating expenses especially.  Sizeable amount has been invested into research and development and we hope that the company would be able to recoup their investments in the coming earnings.  From the result, it seems that the company is making much more losses compared to the revenue generated.  

From the 1D chart above, the price of company has fallen over the last few days.  Both Stochastic and MACD indicator remained on a downtrend.  There is also a death cross forming (when the MA50 cuts MA200 from the top) - typically a bearish signal if the volume remains strong.

With decreasing net assets (less liability), I would prefer to monitor the company from the side till we need improving bottomline and profitability.  I would remain a spectator, not an investor for the coming months, especially when the macro environment remain bearish.