What Happened:
Shares of e-commerce and gaming company Sea Limited (NYSE:SE) fell 5.18% in the afternoon session after KGI Securities analyst Andrew Cheng downgraded the stock's rating from Outperform (Buy) to Neutral and assigned a price target of $42. This marks the third downgrade in August 2023, indicating a growing bearish outlook within Wall Street regarding the stock.
Aside from today, the most recent of these downgrades was on August 18, 2023, when JP Morgan analyst Ranjan Sharma downgraded the stock's rating from Overweight (Buy) to Neutral and assigned a price target of $45. The downgrade occurred days after the company disclosed its Q2 2023 earnings, with the user base and revenue missing Wall Street's estimates. Sharma added that "SE's decision to accelerate e-commerce investments in growth is likely to materially weigh on its earnings and share price in the near-term."
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What is the market telling us:
Sea's shares are very volatile and over the last year have had moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was nine days ago, when the stock dropped 11.3% on the news that the company reported second quarter results that missed analysts' revenue estimates. Notably, the digital entertainment segment had revenue of US$529.4 million compared to US$900.3 million in the same period last year due to "moderation in user engagement and monetization year-on-year." As a result, the number of quarterly paying users was down year on year, though it increased compared to the previous period.
On the other hand, adjusted EBITDA beat and was much improved compared to a year ago. Earnings per share also came in above expectations. Moving ahead, management signalled that the company would be stepping up investments. This shows some optimism around the market opportunity but could depress profits in the near to medium term.
Overall, it was a weaker quarter considering the topline miss, and the fall in monetized user base which was down significantly compared to the previous year. These factors are likely weighing heavily on investors' minds, regardless of the profits or cashflows booked during the quarter.
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