Singapore Market

Sea Limited $SE – Is This Fast-Growing Southeast Asian Gaming and E-commerce Powerhouse a Buy?

Calvin Lo

Sea Limited (SE) is experiencing a massive run in its stock price, increasing by more than 5x over the past year even after the recent tech sell-off.

Sea has been doubling its annual revenue the past 3 years at least. In its latest quarterly results update, management is expecting to repeat the feat again this year 2021.

With such high growth rates and in view of the recent pullback in Sea’s stock price, is the stock a buy?

Company Overview

Sea splits its operations into 3 business segments – Digital Entertainment (Gaming), E-commerce, and Digital Financial Services (Fintech).

Gaming and E-commerce are the main segments, contributing 45% and 50% of total revenue respectively. The Fintech arm is the youngest segment and only makes up the remaining 5% of total revenue.

  • Gaming (Garena) – Main revenue driver is its self-developed mobile game Free Fire (highest grossing mobile game in Latin America and Southeast Asia in 2020 according to App Annie).
  • E-commerce (Shopee) – One of top e-commerce platforms in Southeast Asia. Shopee also intends to scale up operations in Latin America.
  • Fintech (SeaMoney) – Mobile e-wallet services, which also benefits from payment transactions for goods on e-commerce platform Shopee. Sea also recently won a full digital banking license in Singapore and acquired an Indonesian bank PT Bank Kesejahteraan Ekonomi (BKE).

In Sea’s 4Q 2020 results, the company also announced the formation of Sea Capital and Sea AI Labs. Sea Capital will be established as a results of its acquisition of Composite Capital Management, a Hong Kong-licensed global investment management firm. Sea AI Labs’ objective is to strengthen the company’s digital technology capabilities.

Why I’m Bullish

  • All 3 of Sea’s business segments are in new economy / secular growth industries and have experienced a boost from the pandemic.
  • Sea’s core markets are Southeast Asia, Taiwan and Latin America, which are emerging markets with favorable demographics and high economic growth potential.
  • Sea has very high revenue growth rates. However, costs are also increasing fast resulting in widening losses so we need to keep an eye on this. This is not surprising though for high growth companies like Sea which are in the growth phase and focusing on gaining market share. What’s interesting is that although Shopee’s losses are widening, Garena is profitable
  • Strong cash position of $6.2B as at the end of 2020. Sea also has the option of raising more capital from the US stock market.
  • Garena’s user base and monetization is improving with strong growth in both quarterly active users (QAU) and quarterly paying users (QPU).
  • Shopee has overtaken Alibaba-backed Lazada as the top e-commerce site in Southeast Asia.
  • Sea is backed by Tencent, and its Garena unit has a long-term game publishing partnership with Tencent in which Tencent grants Garena the right of first refusal (ROFR) to publish Tencent’s mobile and PC games in Southeast Asia and Taiwan.
  • How Sea will use its full digital banking license in Singapore and the acquisition of Bank BKE is yet to be seen, but presents exciting potential for Sea to make more inroads into the Fintech industry.

Valuation

At Sea’s current stock price of $255 (as of 8/4/2021), Sea has a market cap of around $132B and sporting a price-to-sales ratio of 30x, Sea is definitely expensive by traditional valuation metrics.

However, if management’s guidance for annual revenue for 2021 of around $8.8B is indeed achieved, that would bring its P/S down to a more reasonable 15x.

Risks

  • Garena’s mobile game Free Fire is Sea’s cash cow. If growth or monetization drops off, Sea might lose its ability to fund such rapid growth in e-commerce and fintech. Sea’s cash pile can help as a buffer, but its not a silver bullet for slowing growth.
  • Shopee’s losses continue to widen. Shopee has been offering aggressive discounts to grab market share. One bearish view is that if Shopee could not make a profit even in a pandemic, it may never be profitable. Need to keep a close eye on this.

Closing Thoughts

In my opinion, Sea has one of the best growth prospects at least in Southeast Asia. However, with the stock price running up valuations have become expensive. Be cautioned, this is a high risk investment.

I took the chance to add to my SE position around $210 during the recent tech pullback. As of writing however, the stock is recovering and currently trading at around $255.

With the pandemic situation turning the corner, inflation expectations still lingering and with it prospects of higher interest rates, and no clear path for Sea to sustainable profitability yet, I think I’ll hold for now.

If the stock falls below $210 level again, I might consider adding more. Currently, SE makes up only 2.1% of the portfolio.

What are your thoughts on Sea? Are you bullish or bearish?

Disclosure: I’m long Sea Limited $SE

Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

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