During the first quarter, the S&P 500 fell more than 5% as rampant inflation and the prospect of rising interest rates sparked fears about a recession. But while many investors were selling out of the market, some professional money managers were buying.
For instance, billionaire Chase Coleman of Tiger Global added over 2 million shares of Sea Limited (SE +1.83%) to his hedge fund, making it the fifth-largest position in his portfolio. Similarly, billionaire David Siegel of Two Sigma Advisors doubled his position in PayPal Holdings (PYPL +1.24%), adding nearly 1.8 million shares to his hedge fund.
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Of course, the stock market sell-off has accelerated since the end of the first quarter. In fact, Sea Limited and PayPal have fallen 79% and 74%, respectively, from their highs. Is this a buying opportunity?
Let's dive in.
1. Sea Limited
Singapore-based holding company Sea Limited operates primarily in Southeast Asia and Taiwan, though it has expanded into Latin America and Europe. Its video game business Garena is the developer of Free Fire, the highest-grossing mobile game in Southeast Asia and Latin America for the past 11 quarters. Better yet, Garena is highly profitable, and that cash flow allows Sea to invest aggressively in its e-commerce and fintech businesses.
On that note, Shopee is the largest online marketplace in Southeast Asia in terms of monthly visitors, and it was the most downloaded shopping app globally in the first quarter. To reinforce its leadership, Sea offers a number of value-added services to merchants. That includes digital payments through its fintech business Sea Money, as well as solutions for logistics, fulfillment, and advertising.
In the first quarter, Sea's revenue rose 64% to $2.9 billion, but its GAAP loss widened to $1.04 per diluted share as operating expenses outpaced sales. In particular, R&D spend more than doubled. But given the size and rapidly evolving nature of its addressable market, Sea is investing aggressively to grab share.
Southeast Asia is one of the fastest-growing economies in the world, and the number of internet users in the region is rising quickly. By 2025, e-commerce spend is expected to reach $234 billion and digital payment volume is expected to reach $1.2 trillion. That means Sea has a long runway in its core geographies, and its addressable market is even bigger if you include its operations in Brazil, Mexico, and Spain.
From that perspective, Coleman's decision to buy during the first quarter makes sense. And with shares trading at 3.7 times sales, Sea Limited is cheaper today than it has been for the vast majority of its time as a public company. Of course, unprofitable stocks have fallen out of favor on Wall Street in the current economic environment. But if you can handle volatility, now looks like a great time to buy a few shares.
NASDAQ: PYPL
Key Data Points
2. PayPal Holdings
PayPal is one of the largest fintech companies in the world. Its network connects 394 million consumers with 35 million merchants, enabling digital transactions across brick-and-mortar shops, branded websites, online marketplaces, and mobile apps. Thanks its broad portfolio and brand authority, PayPal is the most accepted digital wallet in North America and Europe.
In the first quarter, PayPal posted lackluster financial results. Revenue climbed 7% to $6.5 billion and non-GAAP earnings dropped 28% to $0.88 per diluted share. However, the company faced tough year-on-year comparisons, as non-GAAP earnings grew 84% in Q1 2021. Additionally, the loss of eBay's business, high inflation, and supply chain issues presented significant headwinds, but there is light at the end of the tunnel.
PayPal will lap the worst of the eBay impact in the current quarter, and management says it will no longer be an issue in the second half of the year. More importantly, PayPal puts its addressable market at $110 trillion, and management is executing on a robust growth strategy.
In the last year, the company expanded its brick-and-mortar presence with QR Code payments, and it debuted PayPal Zettle point-of-sale software in the U.S. PayPal also redesigned its namesake digital wallet, adding features like crypto trading and shopping rewards. That's particularly noteworthy as the number of consumers using a digital wallet is expected to double by 2025.
Perhaps more exciting, the company is working to monetize Venmo more effectively. It launched the Venmo credit card in 2020, and PayPal has partnered with retailers like Revolve and DoorDash to accept Venmo at checkout. Better yet, Venmo payments are coming to Amazon later this year. With more than 85 million Venmo accounts in the U.S., that could supercharge growth.
All things considered, Siegel's decision to add more PayPal to his hedge fund looks like a smart move. The company benefits from a big market opportunity and a strong competitive position. More to the point, with the stock trading at 3.7 times sales -- near the bottom of its historical range -- now looks like a good time to buy a few shares for your own portfolio.
