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Shares of Sea Limited (SE +11%) are catching a nice wave higher today despite the Southeast Asian e-commerce, gaming, and financial services juggernaut registering its sixth consecutive earnings miss in Q2. Over a year ago, SE turned its attention away from profitability, ensuring its competitive position surrounding its e-commerce platform, Shopee, was more secure as peers began encroaching on its market share. Therefore, the string of bottom-line misses and the 74% plunge in EPS yr/yr in Q2 has not been too shocking. Instead, investors have been watching top-line growth and whether it has consistently outpaced rivals.

• On that front, SE delivered another quarter of healthy sales growth in Q2, posting a 23.0% gain yr/yr to $3.81 bln, topping analyst estimates for the fourth straight quarter. Gross merchandise volume (GMV) expanded by 29.1% yr/yr on a 40.3% pop in gross orders. SE stated that retail and consumer spending trends have been generally healthy across the region.
• From a competitive standpoint, SE was pleased by Shopee's market share in Southeast Asia, noting that it commands a sizeable lead over its peers. Management added that it is observing market share consolidation and an industry-wide take-rate bump. As a result, SE projected positive adjusted EBITDA for Shopee starting in Q3 and continuing thereafter. The company also raised Shopee's 2024 two-year GMV growth rate to the mid-20s.
  • Shopee's two straight quarters of outsized results reflect SE's recent initiatives, including improving price competitiveness, which partly illuminates the sharp earnings contraction.
• With Shopee on track to achieve profitability soon, SE is beginning to prioritize increasing its advertising take rate, which currently sits lower than the industry average for a mature e-commerce firm. SE has been working to make its ad platform more attractive for sellers, hiring a dedicated team to improve its algorithm to enhance returns on ad spend. Thus far, SE is enjoying early success, with the number of sellers paying for ads jumping by over 20% yr/yr. While the base from which SE is starting is unclear, the growth is still encouraging.
• SE's other businesses, Digital Financial Services and Digital Entertainment, recorded solid growth, with Entertainment enjoying solid acceleration from last quarter. Financial Services revs climbed by 21.4% yr/yr, nearly identical to the jump in Q1, led by continued momentum in SeaMoney, which pairs nicely with Shopee. Digital Entertainment posted bookings growth of 21.1% yr/yr, doubling the pace of growth from Q1, supported by Free Fire, SE's long-standing video game that boasts over 100 mln daily active users.

With investors not too concerned about relatively weak bottom-line performance in the immediate term, SE's Q2 results were more than adequate to keep its rally alive. Shares have now added around +30% from last week's intraday lows. SE reiterated that it is not fixated on boosting profits in the near term. Instead, it remained confident that its game plan surrounding Shopee and the accompanying strength of the Southeast Asia demand landscape would eventually produce sustainable profitability, which appears to already be materializing in Q3.