What happened
Shares of Sea Limited (SE +1.01%) soared 38.5% higher in March, according to data provided by S&P Global Market Intelligence. The company reported strong financial results, stunning analysts by showing profitability in the final quarter of the year. As the month went on, Wall Street analysts digested the news and upgraded their outlooks for the company, contributing to the stock's strong performance during the month.
So what
Sea Limited is an Asian company that has business segments in video games, e-commerce, and financial technology. For context, this company had experienced ultra-high growth, with full-year revenue up 101% and 128% year over year in 2020 and 2021, respectively. But as macroeconomic conditions weakened, management pulled back on growth, and the stock was hammered -- at one point, it was down 89% from its all-time high.
NYSE: SE
Key Data Points
In the final quarter of 2022, Sea Limited's management spent 61% less on sales-and-marketing expenses than it had in the prior-year period. This impacted revenue growth -- Q4 revenue was only up 7% year over year. However, the company generated operating income of almost $343 million compared to an operating loss of $442 million in the same quarter of 2021.
This profitability from Sea Limited shocked the market and validated management's timely pivot away from costly growth.
Analysts are now seeing green with Sea Limited and consequently raised their price targets for the stock. For example, HSBC analyst Piyush Choudhary raised his price target from $87 per share to $92 per share, according to The Fly. And it's because Choudhary believes Sea can surpass $3 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2025 -- a big improvement from its adjusted EBITDA loss of $878 million in 2022.
Some analysts took longer to digest Sea's improvements. On March 22, Bernstein analyst Venugopal Garre joined the upgrade party, raising his price target from $80 per share to $100 per share, making note of Sea's bottom-line improvements, according to The Fly. And Garre's note caused Sea Limited stock to pop as well.
Now what
Sea Limited stock is complicated right now. Investors need to evaluate companies by looking at both growth and profits to try to determine potential returns. Sea's focus on profitability is positive. And I find it encouraging that the company still grew in Q4 even though it aggressively slashed advertising expenses.
In other words, it seems Sea can still grow even when focusing on profits. And that's good.
However, Sea's management stopped short of giving guidance for 2023, which makes it hard to know if there'll be enough growth here to warrant market-beating stock performance. Notably, sales for its video game unit are still down, and it's unclear when those will rebound.
That said, Sea Limited's management says its long-term growth ambitions haven't changed. Therefore, there is reason to optimistically believe this company can still grow much larger.
