The COVID-19 pandemic disrupted the traditional economy, but innovation always tends to shine in difficult circumstances. As such, the digital transformation of our everyday lives was accelerated during 2020 and 2021, and many of those changes have persisted even though life has mostly returned to normal.
Sea Limited (SE 0.56%) is a triple threat when it comes to the digital economy, operating in e-commerce, gaming, and financial technology. The company is based in Singapore, and it's focused on serving the booming Southeast Asia region. It generated record financial results during the height of the pandemic, but it has since been swept up in the broader sell-off in the tech sector.
Sea Limited's stock price is hovering near its 52-week low of $52.38, but one Wall Street investment bank thinks it could soar to $190 over the next 12 to 18 months. If it gets there, it will represent a gain of 252% from that low point. Here's why investors should consider buying the stock now.
Sea Limited faces challenges, but it's in the right businesses
Sure, 2022 has been somewhat weaker for technology companies by almost every metric compared to 2020 and 2021. The global economy has slowed dramatically as pandemic-era stimulus programs wind down, and inflation is soaring, which is pushing interest rates higher, shrinking consumers' spending power. But while Sea Limited feels the effects in some parts of its business, it has multiple revenue streams, and overall, the company is growing quite nicely.
Sea Limited's digital entertainment segment is home to its Garena game development studio, and it has been the main drag on the company's revenue this year. In the second quarter of 2021, revenue in that segment grew by a whopping 166% to $1 billion, but it shrank by 10% to $900 million in the more recent second quarter of 2022. Much of that is attributable to the easing of pandemic restrictions around the world, which meant people spent far less time playing games this year.
Still, Garena's Free Fire battle royale mobile game remains the most downloaded title in the world, and also one of the highest grossing. That's despite an eye-popping 39% drop in the number of paid players in the second quarter, and an ongoing ban in India during 2022, which undoubtedly hurt the game's revenue.
Despite those struggles, Sea Limited's e-commerce segment -- its biggest revenue driver -- continues to grow rapidly. The explosion of online shopping is one trend that will likely persist even after the pandemic, as technology is rapidly improving to make it increasingly more convenient than visiting brick-and-mortar stores.
In the first six months of 2022, Sea Limited's e-commerce business grew its revenue by 52% year over year to $3.2 billion, led by its Shopee app -- one of the most popular shopping apps globally.
Sea Limited's total revenue remains strong
Sea Limited still generates significant growth. In 2019 the company generated $2.9 billion in total revenue, which, according to analysts, is on track to soar by 321% in just three years to over $12.2 billion in 2022.
The pace of growth is expected to slow this year and next year compared to the incredibly strong pandemic period, but the trajectory of Sea Limited's revenue still remains firmly upward.
Sea Limited made substantial investments in research and development and marketing to fund its growth over the last few years, and it was correct to do so given the results. But those investments came at the expense of profitability, with the company losing $2 billion in 2021 and a further $1.5 billion in the first half of 2022 alone.
Now that sales growth has slowed, management is shifting its focus to improving bottom-line results. But it's worth pointing out that the company has a fortress-like balance sheet with over $7.7 billion in cash, equivalents, and short-term investments, so it can afford to pivot back to a growth-centric strategy when the economy improves.
Wall Street is on board with Sea Limited stock
Wall Street, broadly speaking, is bullish on the digital economy. In Sea Limited's case specifically, just one analyst out of the 31 tracked by The Wall Street Journal recommends selling its stock. The analysts have a consensus overweight (bullish) rating, with 19 giving Sea Limited stock the highest-possible buy rating.
But one investment bank on Wall Street is particularly optimistic. Goldman Sachs thinks Sea Limited stock could soar to $190, representing 252% upside from its 52-week low.
Sentiment toward the technology sector will need to improve for Sea Limited to stage that mighty gain, but for investors seeking exposure to the fast-growing digital economy, this is one stock to hold for the long term.
