Sea (SE)

E-commerce and gaming company Sea (NYSE:SE) fell short of the market’s revenue expectations in Q1 CY2025, but sales rose 29.6% year on year to $4.84 billion. Its GAAP profit of $0.65 per share was 7.1% above analysts’ consensus estimates.

Company Overview

Founded in 2009 and a publicly traded company since 2017, Sea (NYSE:SE) started as a gaming platform and has since expanded to offer a variety of services such as e-commerce, digital payments, and financial services across Southeast Asia.

Marketplaces have existed for centuries. Where once it was a main street in a small town or a mall in the suburbs, sellers benefitted from proximity to one another because they could draw customers by offering convenience and selection. Today, a myriad of online marketplaces fulfill that same role, aggregating large customer bases, which attracts commission-paying sellers, generating flywheel scale effects that feed back into further customer acquisition.

Competitors offering e-commerce platforms include Amazon.com (NASDAQ:AMZN) and Alibaba (NYSE:BABA), and competitors offering digital gaming include Sony (TSE:6758) and Nintendo (TSE:7974).

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Sea’s sales grew at a solid 17.5% compounded annual growth rate over the last three years. Its growth surpassed the average consumer internet company and shows its offerings resonate with customers, a great starting point for our analysis.

This quarter, Sea generated an excellent 29.6% year-on-year revenue growth rate, but its $4.84 billion of revenue fell short of Wall Street’s high expectations.

Looking ahead, sell-side analysts expect revenue to grow 22.8% over the next 12 months, an acceleration versus the last three years. This projection is eye-popping for a company of its scale and implies its newer products and services will fuel better top-line performance.

User Growth

As an online marketplace, Sea generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.

Over the last two years, Sea’s paying users, a key performance metric for the company, increased by 10.2% annually to 64.6 million in the latest quarter. This growth rate is solid for a consumer internet business and indicates people are excited about its offerings.

In Q1, Sea added 15.7 million paying users, leading to 32.1% year-on-year growth. The quarterly print was higher than its two-year result, suggesting its new initiatives are accelerating user growth.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track because it measures how much the company earns in transaction fees from each user. ARPU also gives us unique insights into a user’s average order size and Sea’s take rate, or "cut", on each order.

Sea’s ARPU growth has been exceptional over the last two years, averaging 11.7%. Its ability to increase monetization while growing its paying users at an impressive rate reflects the strength of its platform, as its users are spending significantly more than last year.

This quarter, Sea’s ARPU clocked in at $74.94. It declined 1.9% year on year, worse than the change in its paying users.

For online marketplaces like Sea, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include payment processing, hosting, and bandwidth fees in addition to the costs necessary to onboard buyers and sellers, such as identity verification.

Sea’s gross margin is below the broader consumer internet industry, giving it less room to hire engineering talent that can develop new products and services. As you can see below, it averaged a 43.8% gross margin over the last two years. That means Sea paid its providers a lot of money ($56.16 for every $100 in revenue) to run its business.

Sea’s gross profit margin came in at 46.2% this quarter, up 4.6 percentage points year on year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Unlike enterprise software that’s typically sold by dedicated sales teams, consumer internet businesses like Sea grow from a combination of product virality, paid advertisement, and incentives.

It’s relatively expensive for Sea to acquire new users as the company has spent 46% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates that Sea operates in a competitive market and must continue investing to maintain an acceptable growth trajectory.

Investors frequently analyze operating income to understand a business’s core profitability. Similar to operating income, EBITDA is a common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of profit potential.

Sea has been an efficient company over the last two years. It was one of the more profitable businesses in the consumer internet sector, boasting an average EBITDA margin of 11.3%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Sea’s EBITDA margin rose by 24.7 percentage points over the last few years, as its sales growth gave it immense operating leverage.

This quarter, Sea generated an EBITDA profit margin of 19.6%, up 8.8 percentage points year on year. The increase was solid, and because its EBITDA margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sea’s full-year EPS flipped from negative to positive over the last three years. This is a good sign and shows it’s at an inflection point.

In Q1, Sea reported EPS at $0.65, up from negative $0.04 in the same quarter last year. This print beat analysts’ estimates by 7.1%. Over the next 12 months, Wall Street expects Sea’s full-year EPS of $1.43 to grow 116%.

Although EBITDA is undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Sea has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 17.7% over the last two years, quite impressive for a consumer internet business.

Taking a step back, we can see that Sea’s margin expanded by 22.7 percentage points over the last few years. This is encouraging because it gives the company more optionality.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Sea is a well-capitalized company with $8.43 billion of cash and $4.15 billion of debt on its balance sheet. This $4.28 billion net cash position is 5.1% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Sea blew past analysts’ EBITDA expectations this quarter. We were also excited its number of paying users outperformed Wall Street’s estimates by a wide margin. It was also comforting that full-year guidance was maintained. On the other hand, its revenue slightly missed. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 9.7% to $156.50 immediately after reporting.

Updated: May 21, 2025 at 10:35 PM EDT

When considering an investment in Sea, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

There are multiple reasons why we think Sea is an amazing business. For starters, its revenue growth was solid over the last three years and is expected to accelerate over the next 12 months. And while its gross margins make it more difficult to reach positive operating profits compared to other consumer internet businesses, its rising cash profitability gives it more optionality. Additionally, Sea’s expanding EBITDA margin shows the business has become more efficient.

Sea’s EV/EBITDA ratio based on the next 12 months is 43.2x. Despite the higher valuation, Sea’s fundamentals really stand out, and we like it at this price. We think it deserves a spot in your portfolio.

Wall Street analysts have a consensus one-year price target of $173.55 on the company (compared to the current share price of $162.31), implying they see 6.9% upside in buying Sea in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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