Sea Limited Stock Forecast

Sea Limited Stock Forecast: Sea Limited is a Singapore-based leading internet platform providing digital entertainment, electronic commerce, and digital financial service businesses in Singapore, Thailand, Latin America, rest of Asia, and internationally.

The company operates through three segments:

  • Digital entertainment,
  • E-commerce, and
  • Digital financial services.

It generates the bulk of its revenue from the Digital entertainment segment, which includes Garena, a global game developer and publisher. Garena also provides access to other entertainment content such as live streaming of gameplay, and social features, such as user chat and online forums.

The company also operates Shopee e-commerce platform, a mobile-centric marketplace that offers users a shopping environment supported by integrated payment, logistics infrastructure, fulfillment, and other value-added services. 

In addition, it offers SeaMoney digital financial services, which include e-wallet services, payment processing, and other financial products such as AirPay, ShopeePay, SPayLater, and related digital financial services brands.

The company was formerly known as Garena Interactive Holding Limited and changed its name to Sea Limited in April 2017. Sea Limited was incorporated in 2009 and is headquartered in Singapore.

The Bull Case for Sea Limited

Sea Limited currently operates in three verticals: Digital entertainment, eCommerce, and Finance.

Garena, which corresponds to their digital entertainment, grew EBITDA by 94% year-on-year, reaching $2 billion. Most of this success can be attributed to Free Fire, the company’s self-developed global hit game, which was the most downloaded mobile game globally for 2020, maintaining this leading position for a second consecutive year.

Shopee is SE’s eCommerce platform. In 2020, Shopee’s Gross Merchandise Value (GMV) was $11.9 billion, an increase of 112.5% year-on-year. Shopee is a leader in Southeast Asia and the largest e-commerce platform in Indonesia. It is also expanding rapidly in Latin America.

Lastly, there is SeaMoney, which serves as a mobile wallet and also powers Shopee Pay. Total mobile wallet payment volume exceeded $2.9 billion for the quarter and $7.8 billion for the full year of 2020. Moreover, quarterly paying users for the company’s mobile wallet services surpassed 23.2 million in the fourth quarter with monthly paying users in Indonesia surpassing 10 million during the quarter.

The company also has continued to expand its suite of online and offline third-party use cases and partnerships. It recently expanded its partnership with Google (GOOG) to offer its mobile wallet as a payment option for the Google Play Store in Indonesia, following its partnership with Google in Thailand from March 2020.

The Singapore-based internet company earned a revenue of $1.57 billion for the quarter, up 101.5% compared to the same quarter last year.

Overall, the company produced negative $2.78 EPS in 2020, and negative EPS of $0.87 for the quarter.  Amongst the three segments, the company’s digital entertainment is the only one returning a profit, bringing in around $1.9 billion in EBITDA. eCommerce, on the other hand, lost around $1.3 billion in EBITDA, while SeaMoney lost around $500 million.

If we look through the lens of history, two loss-making segments should not give investors sleepless nights. SE, in fact, has the best of both worlds. At one end of the spectrum, we have an incredibly profitable and fast-growing segment. On the other hand, eCommerce and Finance are still running into loss; but historical data of other companies in the same line of business shows that they quickly turn profitable once the point of exponential growth is past.

For now, Shopee is making excellent use of the cash it has in hand to fast-track its expansion. We look below at three factors that generate optimism about the great returns this stock could give investors.

SE Target Addressable Market Size Is Enormous

Singapore-based Sea operates mainly in Southeast Asia, with Indonesia being Shopee’s largest e-commerce market.

While the ASEAN (Association of Southeast Asian Nations), like the rest of the world, have been devastated by the pandemic, things are expected to greatly improve with real GDP forecasts of  growth by 6% in the next year. Most of this growth is expected to be fueled by the increased digitalization of the economy. It should not come as a surprise, though, that Indonesia is now poised to overtake India in terms of eCommerce growth.

But then SE’s ambitions are not only restricted to the Southeast Asian market. It is making inroads into the Latin American market at a rapid pace.

In what could be a testimony to its growing influence in Latin America, Shopee has snatched the crown of the most-used app in the region from MercadoLibre (MELI), an online commerce and payments ecosystem in Latin America.

In short, it is rapidly growing in the local market while tackling foreign markets (even more mature and saturated ones) really well.

Also, it is important to note that, in terms of Total Addressable Market (TAM), the sky is the limit for Garena.

Self-developed by Sea, the global hit game Free Fire continued to be the highest grossing mobile game in Latin America and in Southeast Asia for the fourth quarter and for the full year of 2020.

Free Fire-related content recorded over 72 billion view counts across YouTube globally in 2020, making Free Fire the most viewed mobile-only video game globally on YouTube for both 2019 and 2020. It was also the third most viewed among all video games on YouTube in 2020.

The global gaming market, valued at $162.32 billion, in 2020 is expected to reach a value of $ 295.63 billion by 2026, registering a CAGR of 10.5%.

It outperformed movies and sports last year, and Sea Limited is all set to reap rich dividends from this incredible pace of growth. In fact, Free Fire esports tournaments hosted during the quarter accumulated over 170 million online views.

Sea Limited Is Expanding Into New Verticals

While SE operates in three verticals, it has made its intentions clear of leveraging its size and power to foray into new areas of the economy.

It recently acquired Composite Capital, a leading investment management firm founded and led by David Ma.

With this acquisition, the Singapore-based internet company will establish Sea Capital to manage its investment efforts, and “help accelerate the growth of the overall digital economy”. The platform will deploy an initial fund of $1 billion over the next few years.

SE Cash Flow Is Very Strong

An important point to note here is that SE, unlike many other growth companies, has been consistently increasing its cash flow. 

Levered FCF has grown by over 100% in the last year, operating cash flow over 600%, and the good thing is that this triple-digit growth is expected to continue into next year.

Sea Limited Growth Rate Has Eclipsed 100% YoY

Given the galloping pace of SE’s growth, some investors may feel that they failed to board the boat at the right time. Others may be concerned about the company’s lack of profitability –  Sea Limited projects a $1.6 billion net loss in 2021.

However, the company is expected to turn profitable by 2024. The company is venturing into new verticals and growing at a phenomenal pace. It’s projected to double total year-over-year revenue again in 2021 and, more impressively, grow sales fourfold from that figure by 2024.

All in all, SE is currently knocking it out of the park. This is not one of those companies that starts with a bang and then falls into nothingness a couple of years down the line.

Since mid-February 2019, Sea Limited’s shares have grown more than 1,400%.  SE is here to stay, and if it remains on this path, it could continue to be a great stock to own.

The Bear Case for Sea Limited

Despite SE pressing the accelerator with full force, there are a few potential risks for investors to note. 

From a business standpoint, the jury’s still out on how competitive SE’s services will be once it stops running them at a loss.

Also, the competitive scene in the Southeast Asian market is going to get fiercer with China’s tech giant Alibaba Group Holding [BABA], also competing with SE for market dominance.

However, analysts believe that the biggest threat to SE is it becoming a one-trick pony. It is no secret that Garena is currently the company’s golden goose, generating strong margins and cash flow. This provides SE the leeway to continue with its growth and expansion strategies.

But gaming franchises come and go, and there may come a time the company will find its digital entertainment business suffering a decline, with SE failing to replicate the success of Free Fire. Such a scenario could wreak havoc on Sea’s overall financials. This, in fact, is currently the largest risk to an investment in Sea Limited.

However, the consensus view is that such a doomsday scenario is unlikely to occur, and the company will continue to blossom, excelling in gaming, and in new and untapped segments. 

Sea Limited Stock Price Forecast

Analysts’ twelve-month price forecast for Sea Limited ranges from a high estimate of 330.00 and a low estimate of 260.00 per share.

On average, they expect SEA’s share price to reach $300 in the next twelve months. This suggests that the stock has a possible upside of over 23%.

Is Sea Limited Stock a Buy?

Growing incredibly fast in all its segments, Sea Limited has very quickly left its competitors behind to become the leading e-commerce platform in Southeast Asia.

Sea had a modest beginning, starting as a communication platform for video gamers. It later went on to distribute games made by Chinese multinational technology conglomerate Tencent for Southeast Asian audience. It then ventured into its own video game production with its in-house game, Free Fire, which was a runaway international hit.

The company, however, did not want to restrict itself to production of video games, and launched Shopee, its e-commerce platform, in 2015. Around the same time, it launched its digital financial services SeaMoney.

Sea Competitors Left In The Dust

Shopee quickly leapt over its competitors, leaving behind other e-commerce players in the region. Just as Shopee was gaining a lead over its rivals, the pandemic struck, in the process, catapulting Shopee to an astral plane.

While Sea’s stock has pulled back over 10% from its all-time highs recently, it is up massively over the past year, having returned over 455 % over the past 12 months. Revenue growth accelerated in the past three quarters, a fundamental sign of strength.

Over the past 12 months, revenue was $3.59 billion. In its latest quarter, revenue surged 102%, led by 178% e-commerce growth and 72% growth in its digital entertainment division, which includes Free Fire. The company is not profitable yet, although analysts see losses narrowing this year and the next.

Sea Is On An Acquisition Spree

And the company isn’t taking its foot off the gas, either. The company has made its intentions of global expansion crystal clear through a series of acquisitions to boost its financial capabilities. It recently acquired Composite Capital Management, a Hong Kong-licensed global investment management firm.

In 2021, Sea has already taken steps that signal even bigger growth ambitions. First, it continued to invest in its FinTech ambitions by buying Jakarta-based bank Bank BKE. Acquiring a bank amply demonstrates Sea’s determination to become an all-encompassing super app, offering lots of financial services beyond mere e-commerce payments.

Sea Going Global

Additionally, Sea is making heavy investments in Latin America. It initially started with a small e-commerce team in Brazil in 2019, and launched its Shopee app in Mexico in February. This signals Sea’ ambitions of expanding its presence in Latin America, where e-commerce is underpenetrated, and where it is a familiar name, thanks to its hit video game Free Fire.

The company hopes to reap rich dividends from its growth in Latin America, given the fact that Latin America has a bigger population than Southeast Asia, with a GDP of $5.2 trillion in 2019, versus Southeast Asia’s $3.6 trillion the same year.

Basically, Sea has a large addressable market and the size and efficacy to grow both, its product portfolio and its geographic reach, while also growing its core gaming and e-commerce businesses at home.

Shopee is doing a great job at using its free cash flow to expand as fast as it can, and a potential successful Latin American expansion could cause SE share price to appreciate even more over the next year.

If you are a long-term investor with a 3+ year holding period, there’s all the possibility that Sea is going to reward you handsomely, if it continues with its current pace of growth and expansion.  The stocks, no doubt, are expensive but, then, sometimes waiting for the “big drop” can backfire, more so if the company in question is growing at a swift pace.

Sea Limited Stock Forecast

Whenever we talk about “generational” investment opportunities, the first name that comes to mind is that of Amazon. The company started an e-commerce revolution, and then forayed into multiple business segments to become the juggernaut that it is today. 

It is then natural for investors to be on the constant lookout for “stocks that could be the next Amazon“. However, phenomenal success stories like Amazon are once in a century phenomenon, but then there are companies that endeavor to follow the giant’s footprints to carve out a success story of their own.

One such company is Sea Limited, which, rooted in similar industries, continues to relentlessly pursue aggressive expansion into new businesses and markets.

The company’s strong management run by its founders, excellent execution record, financial fortitude, and mission-driven strategy instill a lot of confidence and optimism about its long-term growth prospects. The company’s market cap has crossed $100 billion, but there’s still likely plenty of long-term upside left in the tank.

Sea’s main market is Southeast Asia, but the company, of late, has been aggressively expanding into Latin America, posing a serious challenge to regional satraps such as MercadoLibre. The company’s roots are in gaming, but today it runs three prominent businesses. They are: a) Shopee, the company’s e-commerce business, b) Garena, Sea’s digital entertainment arm, and c) SeaMoney, which is a digital payments and financial services business. 

What is interesting is the company’s business segments have a degree of overlap, thus providing consumers with products and services that integrate together in many cases. The company generated a total revenue of $4.4 billion in 2020, an upswing of more than 100%, in comparison to last year. It was founded, and is still led, by Forrest Li.

Sea Limited Not Profitable Yet 

The company, overall, is still not profitable, but it is expected to turn profitable by 2024. The company’s growth potential can be gauged from the fact that China’s multinational tech giant, Tencent Holdings, acquired 20% stake in 2017, and since has been guiding the company. 

Garena is the company’s cash cow, with its massively successful game Free Fire bringing in huge revenue for the company.  Free Fire was the most downloaded mobile game globally in both, 2019 and 2020, and continues to drive rapid growth for Garena in the rapidly growing mobile gaming industry. 

The cash generated by Garena allows SE to indulge in its growth ambitions.  We all know Amazon Web Services is a cash cow for Amazon, and Garena does the same job for Sea Limited due to high margins.

It has also been observed that most organizations are hesitant to traverse into unfamiliar territories as fear of the unknown often tethers their ambition.  However, it has been a different case with SE. It entered into e-commerce business in Southeast Asia with Shopee in 2015, and today it is the top e-commerce platform in Southeast Asia.

It’s not easy to “come from behind” in a mature market, but Sea Limited has successfully achieved this feat, both, in Southeast Asia as well as Latin America. The company entered into the Brazilian market in 2019, posing a direct challenge to incumbent MercadoLibre [MELI].

The Argentine company, often called the eBay of Latin America, has been in the market for more than two decades. Quite astonishingly, SE managed to overtake MercadoLibre by monthly active users (MAU) in less than two years.  It is not easy for a modern organization to run in different directions and still find success. 

Given that Sea Limited has managed to do just that in merely a handful of years, instills a lot of confidence in SE’s expansion endeavors.

During the Q4 earnings call, Sea announced the formation of two new platforms: Sea AI Labs & Sea Capital. While Sea Capital will help manage present/future strategic investments by the company, Sea AI Labs will focus on the development and application of Artificial Intelligence. 

Although these two new platforms are just getting started, given how well it has done with other segments (Shopee and SeaMoney), it can be safely assumed that these new platforms would prove to be really successful down the road. Furthermore, the company is getting increasingly active in food delivery.

SE Cash Flow Accelerating

Some investors crib about Sea’s inability to return a profit despite rapidly growing revenue. However, they tend to overlook the fact that SE is investing heavily into expansion as well as into creation of new business segments.  The company is also actively involved in setting up businesses in new geographies.

If we look at the company’s cash flow from operations, we see rapidly accelerating cash flow. This gives some analysts confidence that a few years down the line (similar to Amazon), the business will reach a level of scale/maturity that will return handsome profit for the company. 

Is Sea Limited Undervalued?

Sea Limited hugely benefitted from the pandemic as both, e-commerce and gaming, saw a massive surge in popularity during the Covid-induced lockdowns.

Sea share price from its low of $50 per share currently trades over at $246 per share.  With an enterprise value of $123 billion, Sea Limited currently trades at an EV to sales of nearly 28X, which is significantly higher than MercadoLibre which trades at 19X.

However, good companies in a fast expansion mode may initially seem expensive. Investors, as such, need to demonstrate some patience, waiting for the company to catch up to its expensive valuation. 

SE Stock Forecast: Conclusion

Sea Limited may not be the next Amazon, but it resembles the e-commerce giant in more ways than one.

SE may seem expensive, considering the high valuation and lack of profits, but its management style, performance and growth, gives you a lot of confidence about its growth prospects.

The company has a wide moat and optionality, and is firing on all cylinders. If you are a long-term investor looking for high-growth stocks, SE should definitely be on your radar.   

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