Three-headed gaming, e-commerce, and payments company Sea Limited (SE 0.05%) became a sensation among investors in 2020. In just over a year, the stock had nearly ten-bagged from its pre-pandemic share price. But what goes up quickly can also come down.
Shares are down 60% from their all-time highs, and investors might be left trying to figure out whether Sea Limited was a flash in the pan or if the stock will reclaim its highs. Here are three reasons why Sea Limited is poised to shine again for investors.
Image source: Getty Images.
1. Garena continues generating cash
Sea Limited has three primary business segments, including:
- Garena (game developer)
- Shopee (e-commerce marketplace)
- SeaMoney (digital payments)
All three are rapidly growing; however, Garena is the company's only profitable segment today, generating $715 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) in its most recent quarter, Q3 2021. While Sea is still unprofitable, Garena has helped the business turn free cash flow positive in 2021.
SE Free Cash Flow data by YCharts
Garena has the mobile game Free Fire, which is currently the most popular mobile game globally. It has 729 million monthly active users, growing 27% year over year, and its paying users grew 43% to just over 93 million in Q3 2021.
User growth slowed and was just barely up in Q3 over the prior quarter, worrying some investors. However, even if user growth stalls out, Free Fire is a massive cash cow for the company, and that likely isn't going to change overnight. The cash Garena generates is helping Sea invest in growing its e-commerce and digital payment businesses.
2. International expansion success
Sea Limited is trying to shake the tendency for e-commerce companies to win biggest in their home markets. For example, Amazon is the de facto e-commerce giant in the U.S., but it's challenging to go to another company's home turf and replicate a new market's logistics, market approach, and culture.
Sea Limited is giving it a shot and seems to be succeeding. Its Shopee app is most dominant in Southeast Asia, its home market, but Sea has expanded into Latin America, Europe, and India. Sea first launched Shopee in Brazil in late 2019 and has become Latin America's top shopping app in just two years, according to Apptopia.
Free Fire is immensely popular in Latin America, giving Sea Limited the unique advantage of introducing Shopee through the game. Success in Latin America offers a lot of upside; the region has more than 660 million people and is one of the fastest-growing e-commerce markets globally.
Investors will want to follow its progress in new markets each quarter, but the ability to compete in these new, large markets could help fuel its growth moving forward. India could be especially lucrative; it has 1.4 billion people and a substantial middle-class population. And look out, Free Fire is popular in India too, which could bode well for Sea's expansion efforts once again.
3. The valuation finally makes sense again
Amazon is typically a useful baseline when valuing other e-commerce companies; the stock has traded at a single-digit price-to-sales ratio for many years. Sea Limited has grown revenue at least twice as fast as Amazon for the past several years, so it seems fair to argue that it deserves a higher valuation.
Although, we can see where the stock's meteoric rise from 2020 to late 2021 wholly disconnected it from how it had traded in the past. Sure, Sea's growth developments are exciting, but the business likely didn't increase tenfold in value in a year and a half! Sure enough, the stock's fundamentals couldn't support such a high valuation, and it's now come back down to earth.
SE Revenue (Quarterly YoY Growth) data by YCharts
Sea Limited isn't what I would call a bargain today, but the valuation is much easier to justify given what's going on with the business itself. Analysts think that revenue growth will end 2021 up 117% year over year at $9.5 billion, and grow another 48% in 2022 to $14.1 billion. A reasonable valuation gives investors a chance to capture a good chunk of this growth in the form of share price appreciation.
Sometimes a business can take years to catch up to a stock price that's run too far. But, thanks to the marketwide sell-off, investors aren't at nearly as much risk of going through that pain. While shares are down lately, it could be a great time for long-term investors to acquire this quality stock at an attractive price.
