Shares of Sea Limited (SE 2.03%) have been sold off brutally in 2022 as investors pressed the panic button. The drop can be blamed on the broader decline in tech stocks thanks to rising interest rates as well as Sea's cooling top-line growth. But the Singapore-based company regained some of its market mojo in November.
Sea Limited stock shot up 36% on Nov. 15 as investors cheered stronger-than-expected earnings results. The company -- which operates e-commerce, online gaming, and fintech platforms in Southeast Asia, Latin America, and other areas -- reported solid growth in two of its three segments. Sea's focus on improving its margin profile helped it deliver a massive bottom-line beat, with its loss per share turning out to be much smaller than anticipated.
Let's look at the reasons why Wall Street gave Sea stock the thumbs up, and check why it could head higher in 2023.
Sea Limited is making progress, but there are a few hiccups
Sea Limited's third-quarter revenue increased 17% year over year to $3.2 billion. The company's gross profit grew at a faster pace of 21.7% year over year to $1.2 billion thanks to "decisive actions to improve margins." The top-line growth and improved margins allowed Sea to reduce its adjusted loss to $0.66 per share from $0.84 per share in the prior-year period. Analysts were looking for a much bigger loss of $0.99 per share.
Sea's improvements are driven by some tough decisions management took to navigate the economic downturn. The company reportedly reduced its headcount by 10% over the past six months, amounting to 7,000 layoffs. Sea also closed operations in certain markets in India, Latin America, and Europe. So, it hasn't been all smooth sailing for Sea Limited, especially considering that the company was forced to take these steps at a time when its growth curve flattened.
SE Revenue (TTM) data by YCharts
It is also worth noting that not all of Sea's businesses are in the pink of health. While its e-commerce revenue shot up an impressive 32% year over year last quarter to $1.9 billion, and the digital financial services recorded a whopping 147% increase in revenue to $327 million over the prior-year period, weakness in the online gaming business led to a drop in revenue from the digital entertainment segment.
Sea's digital entertainment revenue was down to $893 million last quarter as compared to $900 million in the previous quarter. The bookings in the digital entertainment business nearly halved year over year to $664 million in Q3 as compared to $1.22 billion in the year-ago period. This was a result of a drop in the number of quarterly active users last quarter as well as a reduction in the number of paying users.
Sea's gaming business was hamstrung by a drop in consumer spending amid an inflationary environment, as well as the post-pandemic reopening of schools and workplaces that took gamers out of their homes. These headwinds explain why Sea reduced its bookings forecast from the digital entertainment business to $2.7 billion from the prior expectation of $3 billion. The company also declined to provide guidance for 2023, citing macroeconomic uncertainties.
But why are investors excited?
It is evident that Sea Limited's business is not in the best shape right now. But it looks like the stock's cheap valuation, the steady growth it is delivering despite the weakness in one of its businesses, and the solid prospects of the opportunities it can tap into gave investors enough reasons to buy it.
After all, Sea Limited is expected to clock healthy double-digit growth over the next couple of years. In 2023, for instance, Sea Limited's revenue is forecast to jump nearly 17%. Analysts expect the company to maintain this momentum in 2024 with a 20% increase in revenue.
These projections are not surprising as the e-commerce market in Southeast Asia is growing rapidly and is expected to generate nearly $90 billion in revenue this year as compared to $74 billion in 2021. By 2025, the Southeast Asian e-commerce market is expected to generate $128 billion in revenue. Similarly, the digital payments market in the region is expected to triple by 2030 to $2 trillion in terms of transaction value over 2020 levels.
So, Sea Limited could win big from fast-growing markets in the long run. This is probably the reason why investors don't want to miss the opportunity to buy this tech stock while it is still cheap. Sea Limited stock is trading at just 2.5 times sales. That's a nice discount to its five-year average price-to-sales ratio of 13.3 and also indicates that the stock is overvalued relative to the growth it is clocking.
All of this makes Sea Limited a solid long-term e-commerce play that investors can consider buying while it is still cheap, and they may not want to waste more time before going long as investors' confidence in the company's prospects suggests that it could maintain its impressive momentum in 2023.
