Is It Too Late to Buy Sea Limited Stock?

Sea Limited's (SE -1.05%) stock price dipped 4% on Nov. 16 after the Singapore-based gaming and e-commerce giant posted its third-quarter earnings report. Its revenue surged 122% year over year to $2.7 billion, which beat estimates by $240 million.

However, Sea's net loss widened from $425 million to $571 million, or $0.84 per share, which missed expectations by six cents. On an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, Sea posted a net loss of $165 million, compared to a profit of $120 million a year earlier, as its operating expenses more than doubled.

Image source: Getty Images.

Sea's top-line growth was impressive, but the market's chilly reaction indicated that investors were getting worried about its widening losses. Is it getting too late to buy Sea's stock, which has skyrocketed more than 800% over the past two years, or is this high-growth stock merely taking a breather?

How rapidly is Sea Limited growing?

Sea generated 56% of its revenue from its e-commerce business in the third quarter. This segment runs Shopee, the largest e-commerce marketplace in Southeast Asia and Taiwan.

Sea generated 41% of its revenue from its digital entertainment business, which operates the video game publisher Garena. Garena's top game is Free Fire, a hit battle royale game it launched in 2017. The rest of Sea's revenue mainly comes from its digital financial services segment, which operates its SeaMoney digital payments and fintech services ecosystem.

Here's how rapidly its two largest businesses grew over the past year:

Source: Sea Limited. YOY = Year over year.

Unlike many other e-commerce and gaming companies, which experienced significant post-pandemic slowdowns as more businesses reopened, Sea's core businesses continued to generate explosive growth throughout 2021.

Shopee continues to dominate Southeast Asia and Taiwan, and it's gaining traction in Latin America by expanding into Brazil. Sea now expects its e-commerce revenue to rise 135% for the full year, compared to its previous guidance for 118% growth.

Meanwhile, Garena's Free Fire remains the highest-grossing mobile game across Southeast Asia, India, and Latin America, according to App Annie. That strength indicates the four-year-old game still has plenty of room to run.

But Sea is still losing a lot of money

Sea's top-line growth is undeniably impressive, but the negative adjusted EBITDA at its e-commerce and digital financial services segments continue to offset the positive adjusted EBITDA of its digital entertainment business:

Source: Sea. *Includes unallocated expenses.

Shopee's losses continue to widen, but its adjusted loss of $0.41 per order in the third quarter remained unchanged year over year and quarter over quarter. However, the financial services segment will remain a dead weight as Sea sacrifices its margins to tether more users to SeaMoney's services.

That wobbly business model highlights Sea's greatest risk: It relies completely on Garena's Free Fire -- which faces stiff competition from other battle royale games -- to support the growth of its unprofitable segments. If Free Fire's growth stalls out before Garena launches new hit games, its adjusted EBITDA losses will widen at a much more alarming rate.

However, Sea's cash and equivalents still soared 80% year over year to $11.1 billion in the third quarter, thanks to a big stock and convertible debt offering. That offering will prevent Sea from running out of cash anytime soon, even as it aggressively expands its unprofitable businesses.

Sea still has a bright future

Analysts expect Sea's revenue to soar 110% this year and grow another 51% next year. Based on those bullish forecasts, Sea's stock doesn't look terribly expensive at 13 times next year's sales.

By comparison, MercadoLibre (MELI -1.96%), the leading Latin American e-commerce company which is growing at a slower rate than Sea, trades at eight times next year's sales. Like MercadoLibre, Sea is still in a high-growth phase -- and it will likely remain so as the Southeast Asian e-commerce market grows and it expands across Latin America and other overseas markets.

Until Sea's business fully matures, its revenue growth, gross margin (which rose 390 basis points year over year to 37.5% in the third quarter), its market share, and its ability to consistently raise cash will matter a lot more than its aggressive loss-leading strategies or widening losses.

Sea is still checking all those boxes, so the market will likely keep valuing the company at more than 10 times its forward sales. Even if Sea's annual revenue growth decelerates to about 30% per year, its stock could still easily double or triple over the long term -- so it's certainly not too late to accumulate some more shares of this high-growth company.