More Likely to 5x First: Wish or Sea Limited

ContextLogic (WISH 4.33%), the cross-border e-commerce company more commonly known as Wish, and Sea Limited (SE 6.94%), which owns the Southeast Asian e-commerce leader Shopee, were both crushed over the past year. Wish's stock closed at an all-time high of $31.19 last February, but it now trades at less than $1. Sea's stock skyrocketed to an all-time high of $366.99 last October, but is now worth less than $50 a share.

Both companies disappointed investors with their slowing growth, lack of profits, and murky plans for the future. Rising interest rates exacerbated that pain by driving investors away from speculative tech stocks.

But could either of these battered stocks recover and generate a five-bagger gain in the near future? Let's dig deeper into Wish and Sea's biggest challenges, potential turnaround strategies, and valuations to decide.

Image source: Getty Images.

Why did Wish and Sea lose their luster?

At the time of its IPO in late 2020, Wish served more than 100 million monthly active users (MAUs) across the world. But at the end of the second quarter of 2022, it only served 23 million MAUs.

Wish initially attracted a lot of shoppers by selling a wide range of products at much lower prices than other online marketplaces and brick-and-mortar retailers. It maintained those low prices by sourcing most of its products from overseas merchants, most of which were based in China.

However, that business model resulted in lengthy shipping times and quality control issues. The French government even banned Wish last year for selling dangerous and counterfeit products. Those problems all made it difficult for Wish to retain its customers, especially as it faced stiff competition from Amazon's third-party marketplace, Alibaba's AliExpress, and other cross-border platforms.

To make matters worse, Wish's new CEO Vijay Talwar resigned in early September after spending a mere seven months on the job.

Sea's Shopee is still growing at a much faster clip than Wish, but it's still deeply unprofitable. Over the past five years, Sea mainly relied on Free Fire, a hit battle royale game developed by its Garena gaming division, to offset its e-commerce losses. It also relied on Free Fire to subsidize the expansion of its unprofitable fintech division.

Sea generated impressive top-line growth throughout the pandemic as its e-commerce and gaming businesses fired on all cylinders. But both businesses slowed down as the lockdowns ended. Free Fire's post-pandemic deceleration was also exacerbated by an abrupt ban in India, one of its fastest-growing markets, at the beginning of this year.

As a result, Garena's QAUs (quarterly active users) fell 15% year over year to 619 million last quarter. That slowdown raised a bright red flag since Sea's other businesses are still heavily dependent on Free Fire's profits.

Which company has a better shot at a comeback?

We should always take analysts' estimates with a grain of salt, but they expect Wish's revenue to gradually stabilize and recover in 2023 and 2024. However, it's still expected to remain deeply unprofitable for the foreseeable future.

Data source: ContextLogic, S&P Global.

I think those projections could be a bit too optimistic, though. Wish has already lost more than three quarters of its MAUs in less than two years, its gross margins are crumbling, and it still hasn't found a permanent CEO yet.

Meanwhile, Sea's annual revenue growth is expected to cool off to just over 20% through 2024 as it gradually narrows its losses.

Data source: Sea Limited, S&P Global.

But to achieve that, Sea will need to continue expanding Shopee while narrowing its net loss per order, refresh Free Fire (as it's already doing with the new Free Fire MAX), and diversify Garena's portfolio with new hit games. Yet, those goals seem a lot easier to achieve than reversing Wish's ongoing declines in MAUs and revenues.

The valuations and verdict

Wish's stock trades at just 0.7 times this year's sales, so a five-bagger gain would only boost its price-to-sales ratio to 3.5. But it could still struggle to push that ratio back above 1.0 if its sales continue to decline.

Sea trades at just 2.3 times this year's sales, so a five-bagger gain would lift its price-to-sales ratio to 11.5. That's not cheap, but many other tech companies that are generating about 20% sales growth still trade at around 10 times this year's sales in a challenging market for growth stocks.

Therefore, I believe it would be much easier for Sea than Wish to generate a five-bagger gain over the next few years. Both stocks are still speculative, but Sea is merely sitting in the penalty box, while Wish is circling the drain.