Shares of e-commerce giant Sea Limited (SE 4.21%) were up 6.7% today as of 12:20 p.m. EST. This is more a relief rally than anything else.
Sea has been dragged down along with other high-octane growth stocks since news of the omicron variant hit a month ago. Even after today's pop, Sea stock is down some 30% in the last month, erasing what was up until November a nearly 80% year-to-date return in 2021.
It's not surprising that Sea has been volatile as of late. The company's fast growth is undeniable, riding the wave of fast digitization of the economies of Southeast Asia. More recent expansion into new markets like South America and Eastern Europe are also promising.
However, that growth comes at a cost. Sea uses profits from its video game segment (its marquee game Free Fire) to fuel its e-commerce and digital financial-services divisions -- both of which are currently very unprofitable. The result? A growth stock with lots of potential, but susceptible to wild swings up and down as investors assess the trajectory of future sales and the eventual payoff for this emerging-markets technologist.
Here's the good news: While Sea has taken a page from the Amazon playbook and is dumping excess cash back into operations to focus on expansion, there are early signs of eventual bottom-line black ink. As measured by free cash flow, Sea actually swung to a profit this year.
The company generated $342 million in the last trailing-12-month stretch on revenue of $8.3 billion. That's hardly what would be considered a robust profit margin by most value-oriented investors, but it's a solid start for this young company.
But don't worry right now. If long-term growth is what you're after and you can stomach the roller-coaster ride that is Sea, this company is amply funded to continue spending heavily. The company had $11.8 billion in cash and short-term investments on hand at the end of September, offset by convertible debt of just $3.5 billion. At under 14 times trailing 12-month revenue, Sea stock could be a great long-term deal (think at least a few years, but the more the better) headed into 2022.