Investors hardly need reminding that 2022 marked one of the worst years for investors in more than a decade. Each of the major stock market indexes fell into bear market territory, and the biggest loser was the tech-centric Nasdaq Composite, which is still down more than 31% from its peak in late 2021. Many individual technology stocks fared far worse.
What does bear remembering, however, is that bear markets -- as unnerving as they can be at the time -- are an important part of the natural economic cycle. These downturns historically provided investors with the opportunity to buy supercharged growth companies at discounted prices. Furthermore, every previous bear market eventually bowed out to a new bull market, profiting investors who stayed the course.
One technology stock that looks especially appealing right now is Sea Limited (SE +0.18%). After more than doubling its revenue in both 2020 and 2021, the company has fallen on hard times. Tough comps and macroeconomic headwinds caused investors to jump ship and the stock is down 83% from the peak in 2021. A closer look, however, reveals a stock that investors should be buying like there's no tomorrow.
Image source: Getty Images.
Sea Limited is a triple threat company
For investors who may not be familiar with Sea Limited, a short primer is in order. Sea Limited, formerly known as Garena, is a leading global consumer internet company.
The company's initially started out in game development and its claim to fame was Free Fire, a mobile battle royale game that quickly became one of the world's most successful. The company leveraged the enormous popularity of its flagship product to expand into other revenue streams, including e-commerce and fintech, making the company a triple threat.
Following Free Fire's release in late 2017, the mobile game quickly moved up the charts, becoming the world's most-downloaded mobile game in 2019, 2020, and 2021. This flagship product laid the foundation for the company's digital entertainment segment, which has since expanded its lineup of games. Unfortunately, there was a downside to all that early success. Sea Limited is now saddled with tough comps after a multiyear, lockdown-fueled growth spurt. In the third quarter, digital entertainment revenue of $893 million edged 1% lower year over year.
The move into e-commerce was a natural extension of Sea Limited's existing internet-based business. The company was investing heavily in the expansion of its Shopee online retail platform before the current downturn began and macroeconomic conditions took a toll.
Even with the challenges, e-commerce revenue of $1.9 billion grew 32% year over year in the third quarter. If not for currency-related headwinds, revenue would have grown 39%. This was driven by gross merchandise volume (GMV) of $19.1 billion, up 14% and 21% in constant currency.
Finally, Sea Limited expanded its offering to include digital financial services, called SeaMoney, the company's next big growth area. Third-quarter fintech revenue of $327 million soared 147% year over year, continuing an ongoing streak of triple-digit growth.
NYSE: SE
Key Data Points
Every rose has its thorns
Sea Limited isn't without flaws. The company was investing heavily in its expansion when the downturn got going and Sea Limited's losses mounted. In the third quarter, its net loss of $569 million improved slightly, from $571 million in the prior-year quarter. Economic headwinds have reduced investor confidence in unprofitable companies, helping explain the stock's rapid descent -- but not all businesses are created equal.
Management recently telegraphed a shift in Sea Limited's strategy, with the goal of achieving "profitability as soon as possible." This focus is bearing fruit, as the company improved its gross profit margins, capitalizing on the growth of its e-commerce segment. Furthermore, adjusting for severance and early lease-termination costs, Sea Limited's adjusted EBITDA loss improved 45% sequentially, which shows the company is making progress toward its goals.
A large, growing opportunity
Sea Limited is Southeast Asia's largest internet company, both in terms of revenue and market value. Furthermore, each of the company's segments is an industry leader in the region. Garena's gaming bona fides are well-established. Shopee is the largest pan-regional e-commerce platform in Southeast Asia and Taiwan, while SeaMoney is a leading digital payments and financial services provider in Southeast Asia.
This provides Sea Limited with plenty of opportunity to expand, not only in its existing product lines, but into new, adjacent businesses -- something the company has already proved adept at.
Finally, at just 2 times next year's sales, Sea Limited stock is trading at its cheapest price-to-sales ratio ever. There's a lot of uncertainty baked into the stock, as evidenced by its 83% decline over the past year.
That said, given the company's history of above-average growth -- even in the face of macroeconomic tailwinds -- as well as significant opportunity and industry leadership in several large growth areas, I think investors should be buying Sea Limited stock like there's no tomorrow.
