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Sea Limited Should Arrive -- But Not Before Sailing Into Rough Waters

By Will Healy – Nov 18, 2021 at 6:13AM

Key Points

  • Sea Limited beat on revenue but fell short on earnings.
  • The e-commerce division continues to exhibit triple-digit growth.
  • Sea's long-term prospects remain bright, though the near-term picture appears uncertain.

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Sea continues to log massive gains. Still, investors may have expected more.

Sea Limited (SE -6.01%) offered a mixed report when it reported its Q3 earnings on November 16. The Singapore-based gaming and e-commerce giant beat on revenue but missed earnings estimates.

This sent the stock down in the subsequent trading session. That move counters the massive increases in the stock since its IPO. Despite robust prospects for long-term business success, the stock's struggles could persist for a longer period.

Online shopper holds a phone and a credit card while sitting on a couch at home.

Image source: Getty Images

The earnings report

For the third quarter of 2021, Sea Limited reported revenue of almost $2.7 billion, surging 122% from the year-ago quarter. This beat consensus analyst estimates of approximately $2.5 billion.

The company also reported a net loss of $571 million, or $0.84 per share, up 34% over the same period. This missed consensus estimates for a smaller $0.65 loss per share. Sea's losses widened even though the cost of goods sold and operating expenses rose slower than revenue, increasing 109% and 106%, respectively. Further down the income statement, a 118% increase in income tax expenses to $101 million contributed significantly to its greater net loss.

Furthermore, Sea raised its guidance for fiscal 2021. It now expects GAAP revenue of between $5.0 billion and $5.2 billion, up from the previous $4.7 billion to $4.9 billion. If the midpoint of this new range holds, it will amount to a 135% year-over-year increase from the year-ago period.

The bottom-line miss disappointed investors, and the stock fell 4% in the next trading session.

Where Sea stands

From its origins as a Singaporean gaming company, Sea Limited has branched out into both e-commerce and fintech. The gaming division, Garena, generated about $1.1 billion of top-line sales during the quarter, a 93% increase from year-ago levels. Though it did not report revenue for its fintech division, Sea claimed about $4.6 billion in managed payment volume during the quarter.

However, the division claiming most of the revenue and growth is the e-commerce subsidiary Shopee. It generated $1.5 billion in revenue during Q3, a 134% increase over the third quarter of 2020. Additionally, it is now expanding outside of Asia, entering the Latin American market and, more recently, debuting in three European countries.

With these moves outside its home region and massive overall growth, Sea continues to evolve into a global e-commerce juggernaut comparable to Amazon and MercadoLibre. Also, like the Amazon of old, it has prioritized market expansion and revenue growth above profits.

Still, even though losses grow at a much slower pace than the company's revenue growth, the fact that it missed Wall Street's profit estimates has become a point of concern. Consequently, some investors may wonder if the company can ever be profitable.

Moreover, the stock has risen by 80% over the last 12 months and more than 1,900% since its IPO in 2017. This has taken its price-to-sales ratio to about 24. While not a record, the sales multiple had rarely exceeded 10 before the pandemic, and at current levels, the stock may appear priced for perfection. Furthermore, the valuation exceeds MercadoLibre's 12 price-to-sales ratio and Amazon's sales multiple of four, making it the most expensive option among its most prominent e-commerce peers.

SE Chart

SE data by YCharts

Should I consider Sea after earnings?

Like Amazon and MercadoLibre, Sea appears poised to become a force in e-commerce. Also, with its gaming and fintech divisions, it has become a multifaceted conglomerate like its counterparts from the Western Hemisphere.

Nonetheless, Sea's price-to-sales multiple significantly exceeds historical highs, appearing to price the stock for perfection. While the company should succeed in the long term, new investors should consider holding out for a lower valuation on this video gaming and e-commerce stock.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, MercadoLibre, and Sea Limited. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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