Why I exited Sea limited

Let start with a review of their 2021 Q3 results at the group level:
• Total GAAP revenue was US$2.7 billion, up 121.8% year-on-year.
•Total gross profit was US$1.0 billion, up 147.5% year-on-year.
•Total adjusted EBITDA1 was US$(165.5) million compared to US$120.4 million for the third quarter of 2020.

YoY Revenue growth
Year Q1 Q2 Q3 Q4
2021 147% 159% 123%
2020 24% 33% 99% 101%
2019 194% 203% 151% 492%

Compared to 2020 the YoY revenue has clearly accelerated. However, compared to 2019 growth seems to have slowed down. It shouldn’t come as a surprise because of the law of large numbers. The QoQ revenue growth rate also tells a similar story.

QoQ Revenue
Year Q1 Q2 Q3 Q4
2021 13% 29% 18%
2020 -8% 23% 37% 29%
2019 -45% 15% -8% 27%

At group level the EBITDA remained negative like last quarter. However, it was positive in Q3 of 2020 and in 2021. The operating expenses grew 105% this quarter compared to 120% in Q2 which is good as it may indicate economies of scale kicking in. They also grew their sales and marketing spend by 114% which could have a positive impact on sales next quarter. At group level the results look quite good.
Sea limited guidance for their digital entertainment and e-commerce group (updated this quarter). I will discuss the guidance under the respective section below.
However, on double clicking on the different divisions of sea limited the picture suddenly changes. Sea is showing some serious signs of slowing growth.

Digital entertainment:

Digital entertainment posted the following numbers:
• Bookings were US$1.2 billion, up 29.2% year-on-year.
• Adjusted EBITDA1 was US$715.1 million, up 22.3% year-on-year
Their most profitable division i.e., the digital entertainment division and it did not see any QoQ growth 2021:Q2 1,2 billion > 2021:Q3 1,2 billion . So, in essence the growth was flat. This is how the growth looked in the previous quarters 2021:Q1 1,1 billion>2020: Q4 1,0 billion> 2020: Q3 944,7 million>2020:Q2 716,2 million >2020: Q1 512,4 million. So, the trend is clear there is a slowdown. This matter because this is the only profitable division of sea limited. Additionally, their gross margins fell by about 3,5 percent. So, the digital entertainment side of the business seems to have hit a ceiling. Furthermore, they continue to rely heavily on the free fire game and are working on introducing other version of the Game (better graphics); is that the best you can do? So flat growth for their digital entertainment group. Just to drive the point home see the figures below.

QoQ Digital entertainment revenue
Year Q1 Q2 Q3 Q4
2021 10% 9% 0%
2020 7% 40% 32% 6%
2019 70% 13% 2% 6%
2018 -5% 4% 60%

The underlying growth drivers i.e., new users (paying users as well as active users) also tells a similar story growth is flatlining.

QoQ Quarterly paying users
Year Q1 Q2 Q3 Q4
2021 9% 16% 1%
2020 7% 40% 31% 12%
2019 74% 26% 12% 14%

QoQ Quarterly active users
Year Q1 Q2 Q3 Q4
2021 6% 12% 1%
2020 13% 24% 15% 7%
2019 26% 14% 3% 10%

Now to guidance:
They guided for 4.5 billion for 2021 at the high end. So their guidance for next quarter is 4.5 – Q1+Q2+Q3 = 1,0 billion which is a contraction. Furthermore, their conference call was all about free fire which is worrying because the growth is already contracting.
Their ecommerce quarterly earnings are 2021:Q1 922,3 million > 2021:Q2 1,2 billion > 2021:Q3 1,5 billion. QoQ growth rates 2021:Q1 10%> Q2 30% >Q3 25% and for 2020 they were Q1-12%> Q2 63% (seems like a fluke)> Q3 21%>Q4 36%. 2021 seems much better than 2020 for e-commerce except for the one fluke quarter. Their take rate improved from 6.7% to 8.6% percent which is good. Also, their revenue from e-commerce surpassed the revenue from digital entertainment by about 200 million.

From their recent earnings call:
“According to App Annie, globally on Google Play, Shopee ranked first in the Shopping category by total time spent in app, and second by downloads and average monthly active users in the third quarter. Shopee also continued to be the top ranked app in the Shopping category, in both Southeast Asia and Taiwan by average monthly active users and total time spent in app during the quarter. Shopee was the leading app across these same metrics in Indonesia, where we recorded another quarter of triple digit year-on-year order growth”
“Shopee also continued to make good progress in Brazil. In the third quarter, it was once again ranked first by downloads and total time spent in app, and second by average monthly active users, for the Shopping category, according to App Annie”

“Shopee’s total adjusted EBITDA loss per order across all markets was 41 cents in the third quarter. As we have said previously, we are committed to investing efficiently and growing in a sustainable manner across all our markets as Shopee scales. And with that in mind we are pleased to note that adjusted EBITDA loss per order improved both on a year-on-year and a quarter-on-quarter basis in Southeast Asia and Taiwan combined, as well as in Shopee’s other markets combined.”
“Looking ahead, we are prudently and efficiently exploring how to maximize our largest addressable opportunities given our growing market position. In the recent months, we launched Shopee in Poland, France, Spain and India.” They are rapidly expanding to culturally diverse countries and it may not be easy to capture market share in such countries. Moreover, there is the risk spreading yourself too thin in terms of resources and focus.

The seemingly beat and raise guidance of 5,2billion for the full year 2021 at the top end turned out to be very disappointing. 5,2-Q1+Q2+Q3=1,57 which is approximately how much they earned this quarter, so their e-commerce growth is also flatlining.

Digital finance:
QoQ growth rates for digital finance were as follows 2021:Q1 240%> 2021:Q2 156%> > 2021:Q3 119%Digital finance division is showing signs of slowing revenue. However, the underlying growth lever of paid user growth is showing signs of acceleration. Seems odd it could be that the users are using their mobile wallet less or are not making many transactions using the digital wallet. Which is not a very positive sign.


Sea limited is slowing down and dramatically. Their QoQ growth is flatlining / contracting across their major business divisions i.e., digital entertainment and e-commerce. Staying true hyper growth investing style I am going to exit my position. To add to my woes the company isn’t talking about new titles or games. Furthermore, their expansion strategy for e-commerce is entering new markets. Which is not always easy. Of course they have a proven track record of entering new markets(e.g., brazil) and growing at a meaningful pace but can they replicate it in other countries too?

Thank you to board managers and all who contribute meaningful analysis.


Hi Leerling

My notes show they guided that e-Commerce alone would be $5.1 billion for the full year at the midpoint, which would mean Q4 e-Commerce revenue would be $2.017B. So if the other 2 components of Revenue (i.e., Digital Entertainment and Sale of Goods – for which there was no guidance) remained flat, that would be a QoQ growth rate of 26.3% which is substantial.

I believe the market may have reacted with the drop in price because that they continue to show net losses, which in Q3 climbed from -14% to -21%, largely appearing due to the expansion into Latin America

I continue to hold my 5% position.

Hope this is helpful
– John


Hi Leerling:
Sea limited has shown 9 consective growth over 100%(YoY) on his e-commerce division.It is a monster growth rate among all the E-commerce companies around the world. The second one is Meli or PDD ~70% as I remeber.

Although the digital enteratainment’s growth is going to flat,not surprise at all, the e-commerce is a super cashcow when you dig how it works. Give you an actual example,as a shoppe seller in Taiwan, Sea earn around $1.2~1.5 when i sold a $7 item. (3%~7% trading fee + $1 gain from shipping fee). Shoppe mentioned ,in 2019 earning call as I remember, they paid ~$1/order for shiping subsidy; after they occupied the biggest Taiwan market, they earn not only from trading fee but a lot from shipping fee(buyer pay $2 shipping fee/order). You can imagine or caculate based on his E-commerce GMV, how big Sea’s monetizion will be.

Long SE with 20% position

Hello John,

Thank you for taking the time to read through my analysis and respond.  It did force me to go back and
look at the numbers once again. I could not deduce how you arrive at 2.017 billion. You also don’t
explain how you arrive at the above figure except that you refer to your notes which unfortunately
I cannot see. What I can do is explain how I have arrived at the e-commerce guidance for Q4. I would
greatly appreciate it if you can explain how you arrive at your numbers.

Lets start with the guidance provided by sea (the text below comes straight from their Q3 release):
“We are for the second time raising the guidance for e-commerce for the full year of 2021. We expect
GAAP revenue for e-commerce to be between US$5.0 billion and US$5.2 billion, representing 135.3% growth
from 2020 at the midpoint of the revised guidance, compared to the previous guidance of between US$4.7
billion to US$4.9 billion”

From the above text the midpoint ((low end of the guidance + high end of the guidance)/2) of the
guidance for the full year 2021 is 5.1 billion dollars. So, to arrive at Q4 guidance I do the following:
Midpoint of full year guidance for the year 2021 – Q1+Q2+Q3 = Q4 guidance. The Q4 guidance at the
midpoint is 1,48 billion. This is a QoQ contraction! However, at the high end of the guidance they are
flat. With the usual beat they might post low single digit QoQ growth.
I am using the following numbers to compute the Q4 guidance:

e-commerce GAAP Revenue (Million)
Year	Q1	Q2	Q3	Q4
2021	922,3	1200	1500	 
2020	314	510,6	618,7	842,2
2019		177,4	257,2	358,3

@ kinoxie I like sea limited. It is a good company. I think it will be a good investment in the long
term. However, the numbers are telling me that the company is slowing down…. Also, there are several
risks related to execution which I have elaborated on in my previous post.  This doesn’t mean it’s a bad
company but just doesn’t suite my style of investing.  I have very limited slots in my portfolio and I
want companies that I think are executing to near perfection in there (Thank you! Saul’s Investing
Discussions took me a while to get here. It simplifies my investing life.) 


I don’t have a ton to add, here, but I validated Leerling’s $1.48B guidance at the midpoint, and I thought about the reporting of “GAAP Revenues”. The phrase “GAAP Revenues” made me think there is something pointed about its usage, and also that most companies don’t emphasize “GAAP” in the quarterly releases. Clearly, in order to present in USD, revenue and costs are all converted to USD.

Q: Is foreign currency exchange a factor?
A: Didn’t find any discussion of “constant currency” revenues in SEA Limited’s releases, but I did see that they break out foreign exchange impacts between Op-Inc and EBITDA. Impact in 2021 has been positive for the 9 month window, so I don’t expect this is a headwind right now.

There’s not a lot of info in the press release for us to really dig into; this is one of the problems with investing in ADR/ADS issues. Maybe someone with experience in finding and digging into more ‘local’ regulatory reporting can find something filed in Singapore with more information?

On the plus side, I know people are viewing the Free Fire as a declining digital entertainment phenomenon, but revenues in that segment were up 93% YoY while cost of that revenue was only up 61%, so the games they’re selling right now are scaling really well, and/or D&A is waning on those ‘products’. Big increases in R&D and Sales & Marketing need to be expected to pay off, and hopefully both do so.

But, “hopefully” does not address the concerns of this community, and so I tend to agree with Leerling that SEA Limited appears headed for an underwhelming performance by shorter-term investors’ standards.

“Happy Thanksgiving” to all the U.S. folk, and “Best” to everyone else, too. I appreciate the substantive conversations here.

-Another Rob


My notes show they guided that e-Commerce alone would be $5.1 billion for the full year at the midpoint, which would mean Q4 e-Commerce revenue would be $2.017B. So if the other 2 components of Revenue (i.e., Digital Entertainment and Sale of Goods – for which there was no guidance) remained flat, that would be a QoQ growth rate of 26.3% which is substantial.

Hi John,

o GAAP revenue included US$1.2 billion of GAAP marketplace revenue, up 151.4% year-on-year, and US$0.3 billion of GAAP product revenue, up 82.2% year-on-year.

The press release includes product revenue under the e-Commerce GAAP revenue figures. I believe this product revenue is the same as “Sale of Goods”. You can compare the figures between pages 2 and 4 of the press release to see this is the case. For reference, here is a summary of more exact figures from page 4 of the press releases:

	Digital		Sale of	 Group
	Enter.	E-comm	Goods	 Total
1Q21	$781 	$772 	$210 	 $1,764 
2Q21	$1,024 	$1,000 	$257 	 $2,281 
3Q21	$1,099 	$1,310 	$280 	 $2,689 

To be consistent, I assume the guide also includes this product revenue, meaning:

E-commerce (and Sale of Goods) Q4 guide = 5100 - 772 - 1000 - 1310 - 210 - 257 - 280 = 1271.

Your calculation was 5100 - 772 - 1000 - 1310 = 2018.

I think Leerling’s calculation is correct, but I’ve written to investor relations to be sure. Will report back when I receive an answer.


Hi 5th Horseman

Thank you – After rereading, I agree with yours and Leerlings calculations.

After reading your post, and going back to read the press release I see that they reported e-Commerce and Sale of Goods separately in the financials (pp 4) but combined e-Commerce and Sale of Goods in the narrative (pp 2). It makes the most sense that the guidance for e-Commerce most likely includes Sale of Goods (i.e., Product Revenue).

I can totally understand the concern on this one.

eCommerce continues to grow like gangbusters and they continue to enter new markets large and small (Brazil, India, Spain, Poland etc).

Fintech continues to be a longer term strategy where they need to acquire digital banking licenses etc but clearly their native solution within Shopee is a massive internal deployment opportunity.

Garena/Gaming continues to remain both source of amazing potential, (if they can roll out their access to Tencent gaming development pipeline and use the platform and the user base to crack eSports) or a source of potential weakness (the drying up of growth within the funding source for the rest of the business).

This is a non-linear business which in itself might be a risk that could scare investors away but the growth potential also relies on a non-linear consideration.