Sea share price falls on weak Q2 earnings expectations

Sea’s share price and earnings have struggled so far in 2022 as investors turn away from growth stocks. As the tech company prepares to release its Q2 update on 16 August, analysts remain cautious amid rising inflation.

Tech has been one of the worst performing sectors so far in 2022 and Sea’s [SE] share price is no exception, having lost more than half its value since the start of the year. Shares in the Singapore-based gaming and ecommerce company have plunged by 60.4% year-to-date (through 11 August) and could be set to fall further amid downbeat analyst expectations for its Q2 results announcement on 16 August.

According to consensus estimates from analysts polled by Zacks Equity Research, Sea is forecast to report another earnings per share loss, with estimates predicting a 49.2% year-over-year decline to -$0.92. However, revenue is expected to grow to $3.05bn, up 25% year-over-year.

Due to macro uncertainties concerning consumer spending and global supply chains, Sea downgraded its 2022 guidance for its ecommerce division to $8.5–9.1bn from $8.9–9.1bn earlier this year. Shopee, its ecommerce platform, is one of the company’s core businesses, followed by its game developer and publisher Garena and digital payments provider Seamoney.

The expansion of the company’s ecommerce arm into new markets in Spain and Mexico had helped to fuel a 458.7% rise in its share price between 2020 and 2021. However, in 2022 growth stocks like Sea have been battered by rising inflation and interest rate hikes. On 11 August, Sea’s share price sat at $88.58 — 72.9% off its 52-week high of $372.70 that it reached in mid-October 2021.

Sea “successfully navigates uncertainties” in Q1

When Sea reported its earnings update for the quarter ending 31 March, it reported revenue of $2.9bn, up 64.4% year-over-year and beating the $2.76bn forecast by Refinitiv analysts. However, this marked a fall of 9.5% from the previous quarter.

Ecommerce revenues generated by Shopee totalled $1.5bn, up 94.2% year-over-year but a slight fall from $1.6bn in the previous quarter. Sea’s digital entertainment revenue rose by 45.3% year-over-year to $1.1bn. Its digital financial service revenues grew the most, up 359.9% year-over-year to $236m.

At the earnings call, Forrest Li, the company’s co-founder and CEO, praised what he called “solid results”. He said that the company as a whole had successfully navigated uncertainties due to the pandemic to capture “significant growth opportunities”.

But Kristine Lau, an analyst at Third Bridge, told CNBC spending cuts by consumers due to inflation could slice Shopee’s revenues. “For a lot of the high-frequency items or just daily necessities that people had to buy online… I think a lot of that would be reallocated to offline retail,” she said.

Analysts rate Sea shares a ‘buy’ ahead of Q2 results

Key challenges for Sea in 2022 include the faltering fortunes of Garena’s flagship mobile game Free Fire — it was among 54 games, mostly Chinese, that were banned by the Indian government and suddenly wiped from app stores earlier this year. Back in January, Chinese tech giant Tencent [TCEHY] also sold a $3bn share in Sea.

Better news for Sea’s game came in July, when it was announced singer Justin Bieber will debut a new track on Free Fire on 27 August, marking its first-ever in-app performance. Shopee is also opening five new distribution centres in Brazil, which could help boost its ecommerce business.

Analysts appear cautiously optimistic about Sea’s fate ahead of its Q2 update, suggesting it may be undervalued and worth investors buying the dip. According to MarketBeat, a consensus of 14 analysts rate Sea’s stock a ‘moderate buy’, with a price target of $197.40, representing a considerable upside of 122.8% from its 11 August closing price.