The behavior of Sea Limited (SE 0.05%) stock over the last few months may seem baffling. It began surging last fall following a strong report for the third quarter of 2022, only to give back most of those gains. That has delayed its recovery from the 2022 bear market, and it is still down more than 80% from its all-time highs.
However, Sea Limited has turned profitable. And with all but one segment reporting rapid growth numbers, it could still pull off a turnaround as conditions improve.
The state of Sea Limited's stock
Admittedly, investors no longer seem optimistic about Sea Limited stock. Shares began the year having bounced off their bear market lows. But following the company's first-quarter report, the entertainment stock fell hard on the negative performance by its gaming division, Garena.
Consequently, it has largely missed the rally in the first half of 2023. Year to date, the stock is up by only 6%, and it has lost about one-fourth of its value over the last 12 months.
And that recent performance is just part of a longer-term downtrend since its 2021 highs, one that has taken its price-to-sales (P/S) ratio to around 2.5. This is down from two years ago when it routinely sold for more than 20 times sales and even moved above a 30 P/S ratio at one point.
Also, with the company turning profitable, it sells for a forward P/E ratio of just 19. This is down from a high of 31 last May.
Sea Limited and its segments
Admittedly, Sea's financial performance may appear to justify such a valuation. In the first quarter of 2023, revenue under generally accepted accounting principles (GAAP) of $3 billion rose by only 5% year over year.
Still, that number does not reflect the divergent performances of its segments. Over that time, e-commerce revenue increased by 37%, while revenue in digital financial services rose by 75%. If those were the company's only segments, Sea would likely trade at a much higher price.
As mentioned before, what is probably holding the company back is digital entertainment, specifically the Garena gaming segment. It experienced a 43% revenue decline as gamers spent less time online with the lockdowns ending. Also, the popularity of its flagship game Free Fire, the most downloaded game between 2019 and 2021, has begun to wane.
Nonetheless, Sea has made efforts to stoke a recovery in Garena. On the Q1 2023 earnings call, chairman and group CEO Forrest Li said the company has worked to optimize its games based on user feedback and improve the games' community aspect. To that end, it has reported signs of recovery in the popularity of Free Fire and plans to launch more games in the second half of 2023. These should bode well for Garena.
Analysts also appear to see a light at the end of the tunnel. While they forecast only 7% revenue gains for 2023, they expect revenue to rise 15% in 2024. That improvement and the turn toward profitability could finally inspire a long-awaited recovery for the conglomerate.
Consider Sea Limited stock
Given Sea's circumstances, it is probably an excellent time to add shares. Two of its three businesses appear to be firing on all cylinders.
Admittedly, investors have sold off the stock on Garena's performance. However, it looks like Garena is in the midst of a hangover from the end of lockdowns, and yes, Free Fire may need some updating. Nonetheless, as gamers move on from the pandemic and return to normal gameplay levels, the reasons for the bearishness should disappear, leaving Sea Limited free to resume much higher levels of revenue growth.
