Sea Limited (SE 7.99%), the leading gaming and e-commerce company in Southeast Asia, was one of the best-performing tech stocks in the last five years. Its stock price rose more than 14-fold thanks to the solid growth across its gaming and e-commerce businesses.
In the last two months, however, Sea's stock price has fallen more than 36% from its peak of $372.70 amid the sell-down of tech companies. Thanks to its lower share price, Sea is showing up on the radar of bargain investors looking to buy growth stocks at an attractive price.
But before rushing to buy the stock, investors may want to consider the pros and cons of investing in Sea.
What Sea Limited has going for it
Founded in 2009, Sea has grown into a behemoth with businesses spanning gaming, e-commerce, fintech, and others. While it started in Singapore, it is currently doing business mainly across Southeast Asia, Taiwan, Latin America, India, and more. It has also entered into Europe and the U.S. recently.
The secret recipe to Sea's success is its localized execution. When Sea enters a new market, it will tailor its strategies, products, and management team to local nuances. For example, Sea employs local management teams to lead, translates its gaming and shopping platform into local languages, and offers local payment methods to ease customers' transactions.
So far, Sea's localization efforts have been wildly successful, which is evident in its numbers. From 2016 to 2020, revenue rose nearly 13-fold, from $346 million to $4.4 billion. Similarly, gross profit surged 12-fold, from $113 million to $1.3 billion. In 2017, Sea had 88 million in gaming quarterly active users (QAU) and $1.6 billion in quarterly e-commerce gross merchandise value (GMV). By the end of 2020, gaming QAU hit 611 million while quarterly e-commerce GMV topped $11.9 billion. One downside is that Sea remained unprofitable throughout this period as it invested heavily to grow its business.
While Sea executed well in the past, its future looks equally promising. According to the e-Conomy SEA 2019 report by Alphabet's Google, Temasek, and Bain & Company, Southeast Asia's internet economy will triple from $100 billion in 2019 to $300 billion in 2025. As the leading internet player in this region, Sea is well-positioned to ride the growing trend.
But Sea's opportunity doesn't end here. Sea's Free Fire is a top-grossing mobile game in Latin America and India, and Shopee is already the second-ranked e-commerce platform in Brazil measured by its monthly active user (MAU) count. In other words, there is a good chance that Sea could also become a leading internet company in these emerging markets.
The headwinds Sea Limited is facing
While there is plenty to like about Sea, investors should note the potential downsides.
Sea is still unprofitable. It has been investing aggressively over the past few years to build Shopee, initially in Southeast Asia and Taiwan, and now in Latin America. Since 2020, Sea began actively growing SeaMoney (Sea's fintech business). As a result, both segments remain in the red -- Shopee and SeaMoney reported operating losses of $741 million and $166 million, respectively, in the latest quarter.
While Shopee and SeaMoney burn significant cash, Sea has historically bankrolled these investments with its profitable and growing gaming business (Garena). As Sea generates enormous profit from Garena -- $612 million in operating profit in the latest quarter -- it reinvests this profit into Shopee and SeaMoney. Yet, Garena's growth is slowing down lately, which may hold back Sea's ambitious investment plan for its younger businesses. This, in turn, could affect Sea's companywide growth rates.
On top of that, Sea's stock is trading at 16 times price-to-sales (PS) ratio -- a high valuation even after its recent stock price correction. In comparison, leading tech companies in Asia such as Tencent and Alibaba are trading at a price-to-sales of 7 and 3, respectively. The bulls may argue that Sea is growing faster, which deserves a higher valuation. Still, Tencent and Alibaba are profitable and also growing at double-digit rates. Comparatively, Sea's stock looks rather expensive.
Is Sea Limited stock a buy?
Sea is riding on a few massive trends such as the continued digitization in Southeast Asia and the growth in e-commerce globally, which could power its growth for years to come. Yet, its shares are not cheap even after the recent decline in share price. Moreover, Garena (Sea's cash cow) is seeing a slowdown in growth.
So should you invest in Sea now? The answer is, it depends.
For investors who have the temperament to hold for the long term, now might be a good time to buy some stocks. After all, Sea's share price has fallen by about 36% from all-time highs, making it much more affordable than a few months ago. Such investors, however, must be willing to tolerate a potentially much lower stock price in the coming months.
But for conservative investors, it might be worth waiting for an even better entry point before buying the stock.