SE Stock: Compelling, but Has Problems to Fix

The markets are cooling off, and tech stocks are one of the biggest casualties. Despite the dips in these stocks, investors can still make money due to a stock’s long-term value. Sea Limited (SE) is a quiet performer. The Southeast Asian tech giant has had a great first quarter, hitting it out of the park at a crucial time.

Sea Ltd. operates Shopee Pte Ltd., a multinational e-commerce company founded in 2015. Shopee provides a platform for those who wish to buy and sell goods online. Shopee makes money from advertising, logistics services, and transaction fees. Since its initial launch, it has had a huge growth spurt, with monthly visitors now at three hundred million. Shopee is now the largest e-commerce platform in Southeast Asia.

Shopee is the company’s biggest segment, but others give the company a diversified revenue pool. Sea Ltd. is a platform that offers financial services under Shopee Pay, SPayLater (Shopee’s Pay Later feature), and other brands. It provides assistance with its technological services through partnerships in the Asia and Brazil markets.

Finally, the company also has a great gaming segment. Game-development company Garena has been around for over a decade and has emerged as a strong performer. Garena helps you find the game you’re looking for, whether it be casual or competitive in nature. In 2017, it released one of its most popular games – Free Fire – developed by 111dots Studio. It is one of the most successful games, having reached 150 million daily active users in 2021.

However, there have been risks in the past that still pushed investors away from this stock. If the company can alleviate the issues highlighted in this piece, the stock can move higher. I am neutral on SE.

The Timing Couldn’t be Better

SE’s stock surged 14% on May 17, following excellent earnings. The company’s revenue rose 64% year-over-year to $2.9 billion, which beat analysts’ estimates by $40 million, and executives have produced a significant increase in shareholder value. The adjusted net loss for the quarter widened from $320 to $445 million, or under a dollar per share on a GAAP basis. Despite this, it still surpassed analysts’ expectations.

Its EBITDA was in the red at $510 million. Compared to a year ago, it’s down substantially from a positive $88 million. On an accounting principle basis, SE reported an unadjusted net loss of $422 million versus $580 million last year.

All of the company’s underlying segments are doing very well. Selling online has allowed Sea to become one of Southeast Asia’s most respected e-commerce retailers. Its GMV and gross orders have increased dramatically – jumping 39% to $17.4 billion. E-commerce revenues made enormous strides and grew 64% year-over-year to $1.5 billion.

Another major advantage for Sea investors is the surging Digital Entertainment revenue. Garena is a top video game publisher, which increased its domain revenue 45% year-over-year last year to $1.1 billion. The segment has been a gem for the company.

Finally, with its Digital Financial Services segment growth, it has seen mass adoption of its new payment platform and other financial services. Revenue for the segment rose by 360% to over $236 million. However, its adjusted EBITDA loss narrowed from $153 million to $125 million. Sea Money saw a year-over-year increase of 78% in the number of active users and $5 billion in transaction volume processed through the mobile wallet.

Risks from Multiple Angles are Pressuring Sea

Sea has created a moat that fuels its success and keeps it protected. However, some near-term concerns for the global consumer internet company could keep a large section of investors at bay.

Sea has been losing a lot of money since its headquarters was renovated & expanded. It mainly attributed those losses to the fact that it consistently had to spend more on operations, including salaries & office space. Investors aren’t too keen on companies that can’t contain costs. Therefore, this is an area that Sea needs to work on across the board.

It is also facing headaches with its digital-entertainment segment. 111dots Studio’s first game, Free Fire, made 2017 a great year. The game broke records and reached 150 million daily active users in 2021. However, the game has slowed down a bit. Now, granted, the usage growth of the company was wildly explosive during its initial years. Free Fire uses Garena’s profits to stop Shopee’s losses. Hence, this should ring the alarm bells for Sea investors.

In India, the game has been banned. It is one of the biggest populated countries in the world and has 95 million gamers as of 2021. Sea couldn’t provide any guidance for Garena, but its slowdowns will likely continue unless it aggressively rolls out new games or convinces India to reverse the ban. Currently, the company is pinning its hopes on Moonlight Blade and Free Fire Max.

Wall Street’s Take

The sentiment surrounding Sea on Wall Street is overwhelmingly bullish right now. The global consumer internet company has a Strong Buy consensus rating based on 15 Buys and two Holds. The average Sea Limited price target of $152.12 implies upside potential of 76.3%.

The Bottom Line on Sea

While trading at the lower price it has been at for the past year, this pullback provides investors with a potential opportunity. However, Sea needs to control its costs and mount a comeback in its usage.

Ultimately, the company has the operating model to succeed in the long run. Nonetheless, until it gets rid of its easily solvable teething problems, such as the lack of cost control, it will not become a favorite among e-commerce companies.