Where Will Sea Limited Stock Be in 1 Year?

Sea Limited's (SE 0.05%) stock price plunged 22% on Nov. 14 after the Singapore-based e-commerce and gaming specialist posted its third-quarter report. Revenue rose 5% year over year to $3.31 billion and exceeded analysts' expectations by $90 million. It narrowed its net loss from $569 million to $144 million, or $0.26 per share, but widely missed analysts' forecast for breakeven earnings.

That mix of sluggish growth and red ink was disappointing, but could Sea's stock recover over the next 12 months? Let's review its biggest challenges, turnaround plans, and valuation to find out.

Image source: Getty Images.

An unbalanced business model

Sea's Shopee is the largest e-commerce marketplace in Southeast Asia and Taiwan, but it's still deeply unprofitable. Its other major business is Garena, a video game publisher that generates most of its revenue from a hit game called Free Fire.

Free Fire's explosive growth after its launch in 2017 helped Garena turn profitable on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis. Sea then used Garena's profits to subsidize Shopee's unprofitable expansion -- which was driven by loss-leading promotions and shipping subsidies -- as well as the expansion of its SeaMoney fintech ecosystem. In other words, Sea was balancing its entire business on a single hit mobile game.

Shopee and Garena both experienced explosive growth during the pandemic as people shopped online and played video games more frequently. But instead of capitalizing on that temporary growth spurt to expand Shopee's first-party logistics network and diversify Garena's gaming portfolio, Sea plowed most of its cash into Shopee's overseas expansion and the development of more fintech services.

That strategy backfired after the pandemic ended. Shopee's revenue growth cooled off as it faced tough year-over-year comparisons, macro headwinds, and intense competition from ByteDance's TikTok and Alibaba's Lazada. That slowdown forced it to shutter its overseas marketplaces in Latin America, India, and Europe. Garena's bookings fell as Free Fire lost quarterly active users. The game was also temporarily banned in India, one of its fastest-growing markets.

Another quarter of disappointing growth

During Q3, Shopee's year-over-year revenue growth accelerated slightly while Garena posted a slightly milder decline in bookings. Its total revenue rose about 5% for the third straight quarter, but that was still a jarring slowdown from its double-and triple-digit revenue growth over the past several years.

Data source: Sea Limited. YOY = year over year.

Sea has been cutting costs as its revenue growth cools off. Shopee is still unprofitable on an adjusted EBITDA basis, but its fintech segment has stayed profitable on the same basis over the past four quarters, while Garena's bottom line remains in the black. As a result, Sea generated positive adjusted EBITDA of $35 million in the third quarter, compared to an adjusted EBITDA loss of $358 million a year earlier.

But Sea is also ramping up its investments as it cuts costs. It plans to strengthen Shopee's first-party logistics network, reach more customers with more self-service lockers, expand its live-streaming shopping ecosystem, and develop better delivery scheduling and tracking features for its app. It's also adding new monetization features to Free Fire to squeeze more bookings from its existing players. It's still unclear whether it can balance all those expansion plans with its cost-cutting efforts.

Where will Sea's stock be in a year?

Sea could benefit from Garena's relaunch of Free Fire in India and Indonesia's recent ban on direct sales of products on TikTok, but those tailwinds could be temporary. It could keep cutting Shopee's costs, but it could also lose merchants and shoppers as it reins in its subsidies and promotions. Garena could also fall back on two other popular games -- Arena of Valor and Call of Duty Mobile -- as it explores the development of new first-party games to reduce its dependence on Free Fire.

For now, analysts expect Sea's revenue to rise just 4% to $13 billion this year. However, they also project it will generate positive adjusted EBITDA of $1.3 billion -- compared to negative $878 million in 2022 -- as it cuts costs and streamlines its business. Those growth rates might not seem impressive, yet its stock also looks cheap at just 2 times this year's sales and 16 times its adjusted EBITDA. But Alibaba -- which has a better diversified and more profitable business model -- looks even cheaper at less than 2 times this year's sales and 6 times this year's adjusted EBITDA.

So unless Sea's revenue growth accelerates and it proves it can balance its investments with its cost-cutting measures, I'd expect its stock to trade sideways and underperform many of its e-commerce and gaming peers over the next 12 months.