3 Reasons Sea Limited Is a Buy for the Long Haul

Sea Limited (SE 7.57%) investors have been on a wild ride this year, with the stock rising more than 60% in 2023 up until last week's earnings report, after which the stock promptly dropped nearly 20%.

While a slight miss on the bottom line might have been the excuse short-term investors needed to take some profits, Sea Limited actually delivered some impressive results when looking under the hood at its most important e-commerce and fintech segments. Still down some 80% from its 2021 highs, Sea's shares look interesting on this recent dip.

In fact, there aren't one but several good reasons to scoop up Sea shares for the long haul at these prices.

1. Proven execution in three different businesses

One of the keys to identifying stocks with outsized, long-term potential is to identify an all-star management team. Sea's CEO Forrest Li and his team have clearly proven themselves as such.

Sea started merely as a video game publisher for third-party games in Southeast Asian countries in 2009. But in 2017, it launched its first in-house developed game Free Fire, which went on to become a global hit and attract 150 million players by 2021. In 2014 and 2015, Sea launched its digital-financial services SeaMoney and then its e-commerce platform Shopee. In just seven short years, Shopee now leads in e-commerce in six major Southeast Asian countries and is growing fast in Brazil, where it launched in 2019. Meanwhile, the company's digital-financial services have taken off and is now Sea's highest-growing segment.

Being able to execute at the top of not one but three fairly different industries is a testament to management's prowess, especially when you think about the difficulties of serving e-commerce to emerging markets. For instance, Indonesia is a country of 10,000 islands and had been too complicated for third-party logistics services to cover. However, on the recent conference call, Sea's management noted that 95% of the country is now covered by Shopee's own logistics services.

Overtaking established leaders and solving customer problems in emerging markets is no easy feat; based on its track record of doing this repeatedly, Sea's management should have earned the trust of investors by now.

2. Adaptability

Of course, operating in dynamic emerging markets and volatile financial markets is never a smooth ride. The massive shift from the pre-pandemic, low-interest environment to a high-inflation, high-rate environment in 2022 to 2023 has proven challenging not only for Sea but many other internet businesses.

However, management's ability to adapt and quickly reorient the company over the past 18 months has been nothing short of amazing.

In the pre-pandemic and pandemic eras of low interest rates, Sea was able to use its video game profits and publicly raised funds to build out Shopee and SeaMoney into the juggernauts they are today. However, that took lots and lots of cash as Sea was burning through hundreds of millions of dollars every quarter during that time.

When the pandemic subsided, video game profits fell, and interest rates spiked, Forrest Li and his team completely changed tactics. They cut staff, passed up their own salaries, and executed vigorous cost cutting, which became the company's mantra, even down to the type of toilet paper used in the office.

Looking at the company's headline numbers may understate just how dramatic the change has been as the Garena gaming division's profitability has continued to fall. Yet look at the massive change in profitability in the still-growing Shopee and SeaMoney divisions last quarter:

Data source: Sea Limited Q1 2023 press release. Chart by author.

What's even more remarkable is that this $1 billion improvement in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came as the company only grew overall revenue by just $141 million. That just goes to show the depths of Sea's cost cuts, which bodes well for the company's ability to grow efficiently and profitably going forward.

3. Good at market timing

Given the massive change in the inflation and rate environment, Sea's share price has been on a roller-coaster ride. The company went public back in 2017 at $15 per share, reached a high of $372.70 in late 2021, crashed to just above $40 last fall, and is now near $70 per share.

A stock's equity price isn't only a reflection of buyers and sellers in the market; it can also affect how the company can fund itself. Fortunately, Sea's management appears to also understand this very well, along with an uncanny ability to time the capital markets.

As its share price surged higher and higher in 2021, Sea opportunistically raised money with its stock near all-time highs in September of that year, selling shares at $318 per share, along with billions in 0.25% convertible notes. Those funds proved crucial to Sea, giving it a cash cushion and therefore time to execute its turnaround and make it to profitability in the fourth quarter of 2022.

Then, as Sea achieved profitability in Q4, and with its stock price near 52-week lows, management repurchased $611 million of those convertible notes at a big discount, as the notes' market price fluctuates with Sea's stock price, leading to a gain of $200 million!

Selling high and buying low on its own stock is another way management has created value of shareholders.

Proven management with tailwinds at its back

While there are sure to be bumps along the way, these three factors appear to prove Sea's management team is first-class, with the ability to build and strengthen its three competitively advantaged platforms.

Even in the challenged 2022, consulting firm Bain & Co. sees the Southeast Asian economies growing 4% to 5% annually over the next decade, which is a very healthy annualized rate for this large region. This is due to favorable demographics, government policies, and the rapidly digitizing economies in these countries, which should fuel efficient productivity over time.

All of those factors should benefit Sea's three digital businesses. With the company trading at just 3 times sales and with rapidly improving profitability, long-term investors shouldn't pass up the chance to buy Sea shares on this post-earnings dip.