Sea Limited 2Q26: Headline growth overshadowed EPS miss

Key Points

• Shopee remained the largest driver of growth, supported by higher order volumes, stronger advertising revenue and expanding logistics capabilities.
• Monee is the fastest-growing segment, with revenue up 58.9% and its consumer and SME loan book increasing 62.5% to $11.1 billion ($10.0 billion on-book and $1.1 billion off-book).
• On a headline basis, Garena looks unambiguously strong, with revenue growing 33.5%. However, bookings — a better proxy for cash spending — grew by only 15.5% and fell 18.0% sequentially from Q1.
• We maintain our BUY call with target price at USD 150.

Monee: growth is real, but it is a credit book now

Monee is the fastest-growing segment, with revenue up 58.9% and its consumer and SME loan book increasing 62.5% to $11.1 billion ($10.0 billion on-book and $1.1 billion off-book). Reported 90-day-plus NPLs remained at 1.0%, stable sequentially, while allowance coverage in line with previous quarter at roughly 10% of gross loans. The company added around 5.3 million unique first-time borrowers, while active credit users grew around 34% y/y to more than 40 million at the end of the quarter. User engagement also deepened, with average loans outstanding per user increasing around 20% y/y. Off-Shopee SPayLater has continued to scale well, driven by integration with national QR payment infrastructure and continued merchant onboarding. Notably, the company's latest risk model has helped lift approval rates by around 10% compared with previous models while subsequent delinquency and credit-loss trends will be key.

The cost of that growth is becoming increasingly visible. Consolidated provisions for credit losses rose 71.5% to $555.2 million, outpacing loan book growth, while Monee's segment sales and marketing expenses increased 139.8% to $293.9 million as the business expands into off-Shopee lending and new user cohorts. Segment adjusted EBITDA margin compressed to 20.5% from 28.9%. Management attributed the margin pressure to changes in loan mix, driven by increased contributions from off-Shopee SPayLater and Brazil loans. The growing contribution from Brazil and off-Shopee SPayLater may increase credit and provisioning risk, although this should be assessed against segment-level delinquency and loss data.

Moving forward, we continue to expect strong growth from this segment, which should remain a key contributor to headline growth. However, continued changes in the loan mix, with a higher contribution from off-Shopee SPayLater and Brazil, are likely to create ongoing margin pressure for the segment.

Table 2: Monee Metrics

Garena: the imperfect

On a headline basis, Garena looks unambiguously strong, with revenue growing 33.5%. However, bookings — a better proxy for cash spending — grew by only 15.5% and fell 18.0% sequentially from Q1. Quarterly active users were flat at 666.3 million, while paying users of 68.1 million were up 10.2% y/y but down from 72.6 million in Q1. Average bookings per user also fell to $1.15 from $1.40.

Management attributed the performance to Free Fire, which indirectly reinforces our previous concerns about Sea's dependence on a single flagship title. New titles were launched this quarter, including Palworld Online and Monster Hunter Outlanders, but management provided limited guidance on their bookings and contributions.

Another point to note is the accounting change: from 3Q26, Sea will exclude the net deferred revenue effect from Garena's adjusted EBITDA. On this basis, Garena's 2Q26 restated growth rates will look stronger, but the impact is purely presentational.

Expects a stronger second half, but execution matters

Management did not provide any numerical guidance for the next quarter but reiterated its full-year guidance. For the second half of the year, Sea expects absolute EBITDA to be higher than in the first half, a change from 2025, when second-half EBITDA was lower. The company expects improvements in fulfilment to support EBITDA margins.

Margin trajectory remains a question

Headline growth for the quarter exceeded expectations, but weaker margins have prevented this growth from fully translating into earnings. On the positive side, the e-commerce segment's EBITDA margin improved sequentially, although this was still insufficient to offset the margin contraction in Monee.

While we expected Monee's margins to face some headwinds, we continue to believe that margins should stabilise, supported by management’s anticipated fulfilment efficiencies. As such, we maintain our expectation that margins will rebound in the coming quarters.

Figure 2: EBITDA Margin

Maintain BUY; Upside potential has narrowed

Overall, Sea Limited delivered a strong headline growth, although margin compression and the EPS miss indicate that this growth has yet to translate fully into earnings. Stock prices have gone up by 22% since our last call in early July and are very close to our previous target price of USD 135.

To reflect the increasing share of EBITDA contributed by Monee, we have raised our fair P/E to 24x to reflect Monee’s faster growth and its increasing contribution to group earnings, which implies an upside potential of 29% from current prices. However, the rerating assumes that loan growth can translate into sustainable earnings without a disproportionate increase in credit losses.

As such, we maintain our BUY call but acknowledge that room for upside is not as lucrative as before.

 Table 3: Valuation

Disclaimers:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.