As a leader in emerging-market e-commerce, digital payments, and mobile games, Singapore-based Sea Limited (SE 0.05%) might have had the ideal businesses model for a global pandemic -- and the least-ideal model for the post-pandemic world.
No wonder the stock was a 10-bagger from its early pandemic low to its 2021 high. But likewise, no wonder that with its "stay at home" businesses slowing down, the stock has retreated by nearly 90% from that peak. The stock now sits practically where it was on the eve of the pandemic. That said, there are indications Sea could be getting ready for its next run higher.
Despite the stock's decline, management has been impressive
If you look at Sea Limited's stock price in relation to both its revenue and operating earnings, you'd be hard-pressed to understand how the changes in the latter justified the plunge in the former. After all, revenue has continued to grow, even if that growth has slowed markedly from the more intense periods of the pandemic.
Meanwhile, management made good on its promise to show profitability in this period of higher interest rates. Through cost-cutting and efficiency measures, CEO Forrest Li and his team was impressively able to pivot Sea to profits -- a stark turnaround.
SE Revenue (TTM) data by YCharts.
Of course, the transition hasn't been smooth. Sea's digital entertainment wing, Garena, spearheaded by hit game Free Fire, saw its revenue decline 33.7% year over year last quarter after flattening out in 2022. Free Fire's maturity, the end of the pandemic, and a ban in India that took effect in February 2022 all conspired in the decline of the segment, which is Sea's most profitable in terms of operating margins. In fact, it was Sea's only profitable segment up until the first quarter of 2022. So that decline had been difficult.
However, when that happened, Sea was able to switch on profits in both its Shopee e-commerce segment and its SeaMoney fintech segment, bolstering its balance sheet -- all quite impressive.
Sea may not appeal to many investors
Sea was a darling of growth stock investors back during the high-growth, loss-making years of 2020 and early 2021. However, it achieved its transition to profitability in large part by significantly reducing its sales and marketing spending, which has resulted in a slowdown in its e-commerce segment.
Therefore, investors interested in high-growth companies have fled the stock. However, Sea's stock is likely not cheap enough based on its profits to attract value investors, especially since it doesn't pay a dividend and the company has not been repurchasing shares. In addition, management said late last year that since it had pivoted to profitability and now has a healthy balance sheet with billions in net cash, it would now begin spending more again to reaccelerate growth and take market share.
Therefore, Sea has fallen into somewhat of a limbo with investors, especially as it has pivoted from one strategy to the next.
But it was the right thing to do
While neither growth-oriented nor value-oriented funds may appreciate Sea's flip-flopping on strategy, it was actually the correct choice given the volatile and changing economic environments of the past few years.
While Sea may have more measured growth prospects than it did in the hypergrowth days of the pandemic, it also has a much more reasonable valuation of less than 2 times sales.
This fits the definition of a "growth at a reasonable price" stock -- a type of investing that can be quite successful and was made especially famous by famed mutual fund portfolio manager Peter Lynch.
Clues Sea could be in for a reacceleration
While Shopee's e-commerce revenues slowed following Sea's pivot to focus on profits, early indications show the pivot back to growth is paying off.
After reaccelerating its spending in the second quarter, management reported active buyers grew 11% quarter over quarter in Q3, and gross orders grew 24% quarter over quarter. And key user metrics for the company's new Shopee Live streaming feature more than tripled between June and October of last year.
Growing engagement has also helped the company's digital financial services division, which saw 37% growth. And its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) inflected to $165 million last quarter, approaching the profitability of the gaming division.
Meanwhile, Garena seems to have stabilized, with bookings growing quarter over quarter for the first time in two years. While far below the peak pandemic levels of 2021, the gaming division still brought in $234 million of EBITDA last quarter, and should be a consistent source of profits.
While competition remains a concern, the encouraging quarter-over-quarter growth in those metrics seems to indicate Sea is holding its own. Meanwhile, a recent report by Bain & Co. and Temasek forecast the Southeast Asian digital economy could triple in value between 2023 and 2030. That should be enough growth for several players to benefit, and Sea certainly looks like one of the ones that will survive.
After the severe pessimism of the last couple years, Sea Limited stock looks like a solid buy here.
