Sea Limited (SE 0.05%) stock got a jump on the rest of the market in initiating its bear run back in 2021-2022. While the S&P 500's bear drop started in early 2022, Sea stock started falling in November 2021. While the rest of the market began a recovery in October 2022 that eventually returned it to bull status, Sea stock has yet to recover.
This growth stock with business segments focused on e-commerce, fintech, and entertainment has generally done well at growing its business over that entire stretch, but its stock still sells at an 89% discount to highs it hit in late 2021.
The question Sea stockholders are asking is whether there's a chance that this stock can return to a bull market frame of mind. As they wait for the market to answer that question, they can at least take comfort that the worst is probably over.
The state of Sea Limited
Since the fall of 2022, Sea has been experiencing strength in two of its three business segments. Its fintech arm Sea Money is the fastest-growing part of the company. In the third quarter of 2023, it grew revenue by 37% year over year. This segment of the company accounts for only 13% of Sea's overall revenue.
The most notable recent success for Sea came from its e-commerce segment Shopee, where it is the leading e-commerce operation in seven Southeast Asian countries. Shoppee's e-commerce operations account for two-thirds of Sea's overall revenue.
Where Sea is still hurting is in its gaming segment, Garena. When its most popular video game Free Fire started to level off in revenue generation (gaming revenue largely funds the growth efforts of Sea's other two segments), the market reacted negatively. Even worse, the Indian government banned Free Fire in its country for about 18 months over national security concerns, and that sent the company (and the stock) into a tailspin. Garena's revenue was down 34% year over year in 2023's third quarter.
Sea management responded to the company's issues with Garena by cutting costs and slowing expansion efforts for Shopee and Sea Money. The cost-cutting helped it greatly reduce losses. It reported a net loss of $144 million in Q3, but that was a big improvement over the $569 million loss reported in the prior-year quarter.
Why the worst might be over for Sea
A bright spot in Sea's earnings emerged in its Q3 revenue metrics. Garena reported $592 million in quarterly revenue in Q3, an improvement of 12% from Q2.
As mentioned, India, a market of 1.4 billion people, banned Free Fire for a time, but a modified version of the game was introduced and Indian gamers can play it again. That approval should boost Garena revenue, which has suffered somewhat ever since pandemic lockdowns eased in late 2021.
Sea Money is growing so fast that it could soon outpace Garena in revenue generation. Sea Money reported $446 million in revenue in Q3, a 37% jump year over year.
While recovery for Garena will likely get investors the most excited from a sentiment standpoint, it may become less relevant as investors focus more on Sea's other two segments.
Sea's price-to-earnings ratio (P/E) now stands at 37. While that may seem high considering Q3's continued losses, it's far cheaper than e-commerce giants Amazon and MercadoLibre, which sell for 89x and 91x earnings, respectively. If Sea can restore the confidence in the company that it had during the early stages of the pandemic, it could reach such earnings multiples.
Consider Sea Limited stock
At current levels, Sea Limited is a likely buy. Admittedly, it has had trouble gaining traction amid the volatile performance of Garena and its continued posted losses. But given its sequential growth and the return of Free Fire in India, the company finally appears ready to resume its growth. It also helps that Shopee continues to capitalize on its e-commerce market lead in Southeast Asia.
As more customers make use of its e-commerce, gaming, and fintech offerings, Sea Limited could again experience stock growth that is reflective of the double-digit revenue growth seen in all three of its business segments.
