Market Commentary: Down 24%, Time To Buy the Dip On Fast Growth Stock?
Sea Limited (NYSE:SE), based in Singapore, operates as an Internet platform company that primarily serves the Southeast Asian, Taiwanese, and Latin American markets with three main business units: Garena (digital entertainment), Shopee (e-commerce), and SeaMoney (financial services). Although these may not be well-known on US shores, Shopee is one of the most downloaded shopping apps in Southeast Asia and Taiwan. Meanwhile, Garena has produced the highest-grossing mobile games company in Southeast Asia and Latin America
With such diverse offerings, the company has rapidly established a robust footprint in the tech industry and the numbers back it up.
Key Points
- Sea Limited reported $3.09 billion in revenue for Q2 2023, a 5.2% increase year-over-year. Despite the modest rate of the annual gain, this marks the 20th consecutive quarter of YoY revenue growth.
- The company has recently turned its operating income positive after 17 quarters of negative earnings
- Analysts project a target of $66 per share, indicating over 50% potential upside. Future earnings are also expected to rise, with projections reaching up to $4.83 per share by 2027.
Revenues On The Rise
In the second quarter of 2023, Sea Limited reported revenue of $3.09 billion, a modest increase of 5.2% year-over-year. While the annual gain percentage is low, it continues a 20-quarter unbroken string of YoY revenue gains.
But it’s only in the last 3 quarters that operating income went positive. The prior 17 quarters all ended with EBIT in the red due to aggressive investments in research & development as well as marketing. In spite of those losses, the company’s balance sheet remains pretty as can be with $5.6 billion in cash and short-term investments on the books.
It’s a sign that management has been executing well, and the breadcrumbs of their competence can be followed to the firm’s impressive 46.9% gross margin too.
It’s worth noting that the gross margin for Sea Limited’s digital entertainment sector, Garena, was even higher, registering close to 50% for the same quarter. This indicates a higher profitability for this division, supplementing the overall margins for the company.
Going From Strength To Strength
In spite of the high rates of operational spend in past years, it should be noted that management has curbed investments in marketing of late. From $1 billion in SG&A spend in 2020, the current figure sits at just under half a billion.
Still, earnings are negative but analysts are optimistic about future earnings, which are expected to rise impressively in future years:
- 2024: $2.63
- 2025: $3.27
- 2026: $3.97
- 2027: $4.83
Is Sea A Good Deal Now?
Sea Limited’s Price-to-Sales ratio sits at a very modest 1.6x, suggesting the company is very fairly priced. Analysts have a target of $66 per share on the firm now, which would suggest over 50% upside.
Major investment firms like Morgan Stanley and Goldman Sachs have rated Sea Limited as a “Buy,” emphasizing the stock’s growth prospects. Given the diverse business model and strong growth metrics, the company appears to be undervalued at its current price.
Our estimates are a bit more conservative with 17% proximity to intrinsic value at $47 per share.
For prospective investors, the high P/E ratio of 73x may raise eyebrows, but high-growth tech stocks often command such premiums. It’s crucial to juxtapose this with the growth potential the company has to offer.
Final Thoughts
Sea Limited is a multi-faceted tech giant with explosive growth. While the company is not without its risks, given the slower rate of revenue growth and history of operating income losses, the long-term prospects look promising. For investors who have a taste for high-growth, high-reward opportunities, Sea Limited offers an attractive proposition that’s hard to ignore.
