Southeast Asian holding company Sea Limited (SE 0.05%) saw its share price tumble 83% in the last two years, dragged down by a combination of disappointing financial results and concerns about the broader economy. But most Wall Street analysts now believe the stock is oversold. Indeed, the median 12-month price target of $94.34 per share implies a 54% upside from its current price, and the highest 12-month price target of $159 per share implies 160% upside.
That bullishness reflects Sea Limited's presence in three large markets. Specifically, it has subsidiaries in e-commerce, digital financial services, and digital entertainment, and all three markets are expected to grow relatively quickly in the coming years.
Here's what investors should know.
Shopee: Taking an e-commerce leadership position
Sea Limited's e-commerce segment Shopee is the most popular online marketplace in Southeast Asia and Taiwan. It receives more visitors than the region's next five digital shopping destinations combined, and it was the third-most-downloaded shopping app worldwide in 2022, according to Apptopia. Shopee reinforces its leadership and strengthens the network effect inherent to its business by providing adjacent services for digital advertising, payment processing, fulfillment, and logistics, all of which make its marketplace a more convenient option for merchants.
The company has also moved into Latin America to challenge MercadoLibre in Brazil, Mexico, Colombia, and Chile. Shopee is unlikely to dethrone MercadoLibre in the region, but it has outpaced the latter in mobile app downloads in the Brazilian market for the last two years, so the challenger is clearly having some success.
Looking ahead, online retail sales across all relevant geographies in Southeast Asia and Latin America are projected to increase by 12% annually through 2027, according to Statista. But Sea Limited should be able to grow its e-commerce revenue more quickly given its leadership position in Southeast Asia and its momentum in Latin America.
SeaMoney: The fintech platform that supports Shopee
SeaMoney was created to provide payment processing support to Shopee merchants, but it has since evolved into a larger digital financial services platform. Today, SeaMoney processes payments for third-party merchants in Southeast Asia, both online and offline, in addition to handling most payments on the Shopee marketplace. SeaMoney also offers mobile wallet services and banking services to consumers, as well as ancillary products like credit and insurance.
Looking ahead, digital payment volume in Southeast Asia is projected to increase by roughly 14% annually through 2027, according to Statista. But Sea Limited should be able to grow its fintech revenue more quickly than the industry average due to its relationship with the Shopee marketplace.
Garena: The video game developer behind Free Fire
Garena is a digital entertainment business that offers mobile and PC video games. Its platform connects gamers with licensed content like Call of Duty: Mobile from Activision and Arena of Valor from Tencent, but the company is best known for its internally developed battle royale game, Free Fire.
Garena Free Fire was the ninth-most-downloaded mobile game in the world last year, down from fourth place in 2021 and third place in 2020. But efforts to turn the title into an evergreen franchise appear to be paying off, as Free Fire has seen a resurgence in popularity this year. It was the third-most-downloaded mobile game worldwide in the first quarter, and the second-most-downloaded mobile game worldwide in Q2.
Looking ahead, global mobile game revenue is expected to increase by 7% annually through 2027, according to Statista. Garena could outpace the industry average if Free Fire maintains its momentum, but the video game industry is notoriously fickle. Case in point: Garena struggled quite a bit in the first quarter as paying users across the platform fell 39% to 37.6 million, despite Free Fire's resurgence.
Why Sea Limited stock is worth buying
Sea Limited reported mixed financial results for the first quarter. On the top line, total revenue rose just 5% year over year to $3 billion despite stellar performances from Shopee and SeaMoney. Specifically, while e-commerce and fintech revenue increased 36% and 75%, respectively, digital entertainment revenue from Garena plummeted 43% year over year as its paying user base declined.
On the bottom line, Sea Limited had a fantastic quarter due to the implementation of cost-cutting initiatives, especially efforts to reel in sales and marketing expenses. Sea reported a GAAP operating profit for all three subsidiaries for the second consecutive quarter, and cash from operations clocked in at $606 million, up from a loss of $723 million in the same period last year.
Looking ahead, investors have good reason to be optimistic. Garena Free Fire seems to be regaining popularity, and Garena's active users increased sequentially in Q1 2023 for the first time since Q3 2021. That could easily translate into more paying users in the future. Additionally, Shopee and SeaMoney are well positioned to benefit as e-commerce and digital payments become more popular in Southeast Asia.
Currently, shares trade for 2.8 times sales, an absolute bargain compared to the three-year average of 12.9. Investors should use that opportunity to buy a small position in this growth stock, but not with the expectation of triple-digit returns in the next year. Predicting price action over short periods of time is impossible, so investors that buy shares should be prepared to hold the stock for at least three to five years.
