Sea Limited's (SE 2.03%) stock price has declined more than 80% since it closed at an all-time high of $366.99 last October. The market's enthusiasm for the Southeast Asian e-commerce and gaming giant fizzled out as its growth decelerated in a post-pandemic market and its losses widened.
But even after that steep pullback, Sea's stock has still quadrupled since its IPO nearly five years ago. Let's review the bear and bull cases for Sea to see if it can stabilize and continue growing over the next few years.
Image source: Getty Images.
Sea's delicate balancing act
Sea generated 59% of its revenue last quarter from its e-commerce division. This segment houses Shopee, the leading online marketplace in Southeast Asia and Taiwan. Shopee conquered both markets by undercutting its competitors with loss-leading promotions and subsidies.
Another 31% of Sea's quarterly revenue came from its gaming unit Garena. Garena generates most of its revenue from a single hit game, Free Fire, which was launched in 2017. Free Fire initially generated a stream of higher-margin revenue for Garena that partly offset Shopee's losses.
The remaining 10% of Sea's revenue came from its nascent fintech business, which includes its SeaMoney payments platform and other financial services. Like Shopee, this growing segment remains deeply unprofitable.
Simply put, Sea has been balancing several unprofitable businesses on top of a single mobile game. Management likely believed it could maintain that balancing act for at least a few more years as economies of scale kicked in at Shopee and Garena diversified its portfolio with new games. It also expected that shaky scaffolding to support Shopee's expansion into other crowded e-commerce markets like India and Latin America.
What the bears will tell you about that plan
The bears believe that, like many e-commerce and gaming companies, Shopee and Garena will both face tough slowdowns in a post-lockdown world.
Sea's e-commerce and other services (including fintech) revenue soared 157% to $4.6 billion in 2021, then grew another 84% year over year to $3.3 billion in the first half of 2022. But within that total, Shopee's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) loss nearly doubled to $2.6 billion in 2021, then widened year over year from $993 million to $1.4 billion in the first half of 2022.
As Shopee's growth cooled off and its losses widened, Free Fire lost its momentum. Garena's bookings rose 44% to $4.6 billion in 2021 but fell 34% year over year to $1.5 billion in the first half of 2022. That slowdown was exacerbated by an abrupt ban in India, one of its top markets, earlier this year. As that profit engine stalls out, Sea's losses will widen further.
The bears will claim that Sea's business is collapsing like a house of cards. Analysts expect its revenue to rise just 25% to $12.4 billion this year as its adjusted EBITDA loss widens to $2 billion. That slowing growth and red ink will make Sea a tough stock to own as interest rates continue to rise.
What the bulls will tell you about that plan
The bulls will acknowledge that Sea faces a lot of near-term challenges, but they believe it can overcome those hurdles with three main strategies.
First and foremost, Sea has been reining in Shopee's expenses by shutting down its operations in India, reducing its presence in Latin America -- which is still dominated by MercadoLibre (MELI -1.79%) -- and downsizing its core Southeast Asian business with layoffs in Singapore and Indonesia. Those efforts could gradually right-size its business, narrow its losses, and free up more resources for expanding SeaMoney across Southeast Asia.
As for Free Fire, it's still the highest-grossing mobile game in Southeast Asia and Latin America. Garena believes it can extend the aging game's lifespan with fresh content, esports competitions, and an upgraded version called Free Fire MAX. All those strategies could stabilize its growth in a post-pandemic market and buy it more time to develop fresh games.
Lastly, Sea can afford to operate at a loss for the foreseeable future. It raised more than $6 billion last year in a big stock and convertible bond sale, and it ended last quarter with $6.5 billion in cash and equivalents.
Analysts still expect Sea's revenue to grow by at least 20% annually over the next few years. That's an impressive growth rate for a stock that trades at less than three times this year's sales. MercadoLibre -- which is growing slightly faster than Sea -- trades at four times this year's sales.
Which thesis makes more sense?
I personally believe the bearish thesis still makes more sense. Shopee needs to prove that it can keep growing even as it reins in its discounts, while Garena desperately needs Free Fire to remain popular as the gaming sector cools off. If either of those wobbly strategies fails, it will face an even more painful landing. Therefore, investors should stick with better-run companies -- like MercadoLibre or Pinduoduo -- if they're looking for an overseas e-commerce play in this tough market.
