Sea Limited (NYSE:SE) stock is still trading ~84% lower from its 2021 high, despite most large-cap companies in the space recovering significantly recently. I vividly remember how, despite the bull frenzy that persisted at the time, the Singaporean internet conglomerate was considered one of the more “serious” picks among investors, taking the Asian e-commerce, digital entertainment, and electronic payments markets by storm.
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That’s true, but then again, shares could not quite justify shares soaring from their 2017 IPO price of $15 to $372.70 at their peak just four years later. The market has since punished its own exuberance, as Sea stock is currently hovering near $60.
In my view, Sea’s bull case remains relatively intact. While growth has slowed recently, and some concerns are worth considering, shares appear attractively priced. Accordingly, I am bullish on the stock.
What’s Sea Limited’s Bull Case?
Understanding Sea Limited’s bull case is crucial not only for grasping the stock’s future potential but also for unraveling the reasons behind its tumultuous journey in the public markets thus far. Sea’s investment case is firmly rooted in its prospects as a dominant force in South East Asia’s fastest-growing industries.
While e-commerce and digital economy industries have reached maturity in much of the Western world, with industry giants like Amazon (NASDAQ:AMZN) and PayPal (NASDAQ:PYPL) dominating their respective fields, this is not the case in all markets. For instance, MercadoLibre (NASDAQ:MELI) is making waves in Latin America’s markets (read my latest article on MELI stock here).
Similarly, Sea Limited is accomplishing the same feat in Southeast Asia, a fragmented region with a rapidly-growing population and expanding digital economy. Sea has gained significant market share in Indonesia, Thailand, Vietnam, and the Philippines through its platforms, such as Shopee for e-commerce and Garena for gaming.
These regions are still in their early stages of experiencing the macro trends that Western regions underwent over the past couple of decades, presenting Sea with immense growth opportunities.
Let’s consider Shopee, Sea’s flagship e-commerce platform, as an example. Its quarterly Gross Merchandise Value (GMV) skyrocketed from $6.2 billion in Q1 2020 to approximately $18 billion by the end of last year. This large increase in less than three years resembles the growth levels witnessed by now-mature markets a decade ago.
Sea’s digital payments segment, operating under the SeaMoney umbrella, has also played a pivotal role in the company’s dominance in the South Asia market. Seamlessly integrated into Sea’s broader ecosystem, which includes Shopee and the gaming platform Garena, SeaMoney has experienced phenomenal growth.
In Sea’s most recent Q1-2023 results, the company reported an impressive 75% increase in Digital Financial Services revenues, which reached $412.8 million. This remarkable growth is particularly noteworthy considering the turbulent macro environment of the past year. It underscores Sea’s potential for substantial growth, especially when compared to its counterparts in the Western digital financial services sector, which have witnessed a decline in growth in recent quarters.
The buoyant growth in these thriving industries is what allowed Sea’s shares to sustain a significant post-IPO surge. However, the question remains: Does the company’s current outlook offer enough optimism to sustain another rally, moving forward?
Is Sea’s Corrected Valuation Attractive Enough?
To provide some context on Sea’s valuation, at its peak (November 2021), the stock was trading at over 22 times the company’s forward sales with no potential for near-term profits. Since then, Sea has made notable improvements in terms of growing both its top and bottom lines. In fact, Fiscal 2023 is likely to be Sea’s first GAAP profitable year.
The combination of such a massive share price decline combined with significant financial improvements has resulted in the stock now trading at a forward P/S and a forward P/E of 2.6x and 21x, respectively. Obviously, Sea’s valuation has corrected massively and even appears relatively attractive based on its growth profile.
It’s worth mentioning that following the company’s Q1 results, investors are likely faced with one particular concern, as besides the company’s impressive growth metrics in some areas (e.g., the 75% revenue growth in digital payments, as mentioned previously), some of Sea’s metrics came in rather underwhelming.
For instance, revenue growth decelerated to just 5%, implying a massive drop from its five-year compound annual growth rate of 81.4%. In the meantime, the Digital Entertainment division’s bookings fell by 58% year-over-year and by 15% sequentially. Its quarterly active users also declined by 20%, while the paying user ratio fell to 7.7% from 9.0% in the prior-year period.
That said, Sea’s overall results were strong. Management’s prudent cost management allowed the company’s operating profit margin to expand from -17.2% in Q1 2022 to 8.0% in Q1 2023 and report its second-ever quarter of GAAP net income.
Wall Street analysts expect that the company’s ongoing margin expansion will last in the coming years, projecting that earnings per share will grow from the projected $2.82 for Fiscal 2023 to $3.05 and $4.49 by Fiscal 2024 and Fiscal 2025, respectively. In that sense, Sea stock may be offering a compelling opportunity at its current levels.
Is SE Stock a Buy, According to Analysts?
Turning to Wall Street, Sea Limited has a Strong Buy consensus rating based on 10 Buys and three Hold ratings assigned in the past three months. At $100.12, the average Sea Limited stock price target implies 68.3% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell SE stock, the most profitable analyst covering the stock (on a one-year timeframe) is Scott Devitt from Wedbush, with an average return of 41.05% per rating and a 52% success rate.
The Takeaway
Sea Limited’s stock has endured a substantial decline from its peak, despite most of its Western peers experiencing a solid recovery. However, the company’s stronghold in Southeast Asia’s burgeoning e-commerce and digital economy markets continues to form a compelling bull case.
With platforms like Shopee and Garena experiencing impressive growth and the digital payments segment contributing significantly, Sea Limited has established itself as a dominant force.
Although some metrics in the Digital Entertainment segment have raised concerns, the company’s overall strong performance, improving financials, and attractive valuation suggest that it may offer a promising investment opportunity at its current levels.
