What happened
After initially falling, shares of Sea Limited (SE 0.55%) climbed higher on Friday, increasing as much as 4.5%. As of 2:49 p.m. ET, the stock was still up 4.2%.
The e-commerce, gaming, and payments platform was on the receiving end of a downgrade by a Wall Street analyst, but the news was better than it first appeared.
So what
Goldman Sachs analyst Miang Chuen Koh removed Sea Limited from the firm's conviction buy list, but maintained a buy rating on stock, while simultaneously lowering the price target to $300, down from $460.
Image source: Getty Images.
The analyst posited the mid- to long-term fundamentals for Sea Limited remain strong, but given the recent market environment, he thinks the near-term visibility remains challenging.
For investors with a long-term investing horizon, this sounds more like an opportunity than a challenge.
Now what
Like so many technology companies, Sea Limited's stock has been crushed by the recent tech rout, falling more than 64% since hitting new highs in early November. This corresponds roughly with the timing of the broader market decline. As a result, the S&P 500 is down more than 9%, while the tech-heavy Nasdaq Composite has lost roughly 16%.
Even after the recent drubbing, Sea Limited stock isn't cheap when measured using traditional metrics. It has a valuation of 8, when a reasonable a price-to-sales ratio is generally considered to be between 1 and 2. For perspective, however, the valuation hasn't been this low in nearly three years.
Additionally, investors award some companies with a higher valuation due to their exceptional growth rates, and that certainly applies in this case. In the 2021 third quarter, Sea Limited's revenue grew 122% year over year, while gross profit surged 148%.
The selling has simply gone too far. Analysts' consensus estimates are calling for 2021 full-year revenue of $9.76 billion, which would represent year-over-year growth of more than 120%. While the company isn't yet profitable, this is the result of non-cash expenses, having generated free cash flow of $342 million over the past year.
This may be a rare opportunity to get Sea Limited shares at a discount.
