The Bull Case For Sea Limited Stock

It seems that investors just can’t get enough of Sea Limited lately. The Singapore-based tech conglomerate’s stock is up 55% this year, and recently enjoyed a 6% post-earnings pop after the company reported a rare profit and revenue consensus beat.

But coming off the back of such a great quarter, and with a share price as high as it is right now – SE’s market value has grown 2,250% the last three years – is there any near-term upside left in Sea Limited stock today?

E-commerce Grew 161%

Sea Limited (NYSE:SE) is the holding company for three separate companies: Shopee, Garena and SeaMoney. Each of these distinct segments did well during the global Covid pandemics, having benefited from secular trends that saw an uptick in digital activity across the board.

Shopee is Sea Limited’s e-commerce business. It is the largest e-commerce platform in South East Asia, bigger even than Alibaba’s Lazada.

Customers have been shifting their preference for online shopping for quite a while now, but the outbreak of Covid-19 last year, and the subsequent lock-downs and stay at home orders that came with it, simply accelerated that trend. 

Total revenue for SE’s e-commerce operations grew 161% to $1.2 billion, mostly driven by the expansion of its marketplace business, up 191% at $905 million for the quarter.

Adjusted EBITDA, however, was down to -$580 million, having suffered from heavy reinvestment of its funds being used to grow the segment further. While a half-billion deficit seems large, Shopee was able to reduce its loss per order over the quarter by 20%, from -$0.51 per order a year ago to a loss of -$0.41 this time round.

The rapid rate of growth in online shopping is seen most clearly in the firm’s gross order metrics. Here, the company improved its numbers from just 0.6 billion orders in 2020, to 1.4 billion this year.

Shopee Market Penetration Grows

Shopee’s further penetration into existing and new markets continues apace, with opportunities for growth coming from territories in Taiwan, Malaysia and Indonesia. The company has has a lot of success recently in Brazil, having only entered the market as recently as late-2019. In the time since then, Shopee has risen to be the highest ranked shopping app by time spent on the app and total downloads.

SE’s SeaMoney wing also had a good quarter, and is showing strong trends in growth figures too. Of Sea Limited’s three segments, SeaMoney is the smallest, but is the firm’s business with the most potential for revenue expansion. Total payment volumes for SeaMoney’s mobile wallet were up 150% for the quarter at more than $4.1 billion.

Much of SeaMoney’s growth isn’t just coming from user spending, but also from an actual increase in the number of paying customers using its service. Total user numbers for the quarter grew 110% to 32.7 million, with much of its user activity occurring from off-platform digital payment use.

Besides SeaMoney’s mobile wallet being used at the usual payment touch points, such as convenience stores and the Google Play store, the company’s partnership with Mastercard (MA) in Thailand also now means that it can be used at any one of the more than 200,000 offline outlets that can facilitate Mastercard Contactless payments.

Garena Is Sea’s Biggest Winner

Sea Limited’s biggest winner coming out of the pandemic has to be its digital entertainment offering, Garena.

Over the quarter, segment revenues topped $1.0 billion, up massively from just $380 million in the same period last year. Garena is the only Sea Limited business that is profitable, driven mainly by the success of its high grossing mobile game Free Fire.

Garena’s bookings continue to be high despite a slowdown in quarter-on-quarter growth, which fell from 10% in Q1 2021 to 6% in Q2. In fact, this was the second-lowest growth rate from all of the previous ten quarters.

That said, Garena is really improving where it matters most.

Active users for SE’s gaming arm exploded to a new all-time high of 725 million users, a 45% increase year-on-year, and an 11.8% increase quarter-on-quarter.

Crucially, Garena is also growing the fraction of paying users on its site, too. The number of paying players on its site this quarter was 92.2 million, up 85% year-on-year and 16% sequentially. The penetration of paying users at 12.7% was also another record for the gaming segment as well.

Second Quarter Highlights

Sea Limited’s overall performance in Q2 2021 was encouraging, but the firm is still not profitable.

The company reported a 159% year-on-year growth in GAAP revenues, and a 364% increase in gross profits.

Its revenues of $2.28 billion beat expectations by $260 million, and it also had a rare profit beat – only its second in 12 quarter – with an EPS of -$0.61, up $0.07 from the wider Wall Street consensus.

Business expenses also grew this quarter, which were mainly responsible for the firm’s lack of positive profitability. Cost of revenue rose to $1.35 billion, up from $681 million for the same quarter in 2020, and sales & marketing expenses also spiked 239% to $921 million. All told, Sea Limited’s net loss came to $434 million for the quarter.

SE Valuation A Concern

There’s no getting around the fact that SE is expensive at the moment.

The company currently trades at 23 times its trailing twelve month sales figures, or 19 times if you take the forward fiscal year forecast instead. As mentioned before, Sea Limited isn’t profitable either, but its strong revenue growth of 129% offsets this slightly.

So where’s the value coming from?

Essentially, the bullish price action argument rests on the company’s ability to penetrate new markets and grow existing ones, find new sources of income, and have enough cash on hand to continue expanding its operations. Luckily, SE is able to do all three of these things.

3 Reasons Why Bulls Can Stay Positive On Sea

First, Sea Limited has huge growth potential for new user revenues on its home turf alone. South East Asia’s Gross Merchandise Volume is expected to rise 25% per year, hitting $300 billion by 2025. And given that only 69% of South East Asia’s population is online, there’s room for growth there too.

Second, SE has a great opportunity to generate new income from advertising revenues, which has so far been minimal. This monetization will be driven by increased spending on marketing and advertisement from the growing number of Shopee’s merchant sellers.

And finally, Sea Limited’s cash position is healthy enough to fund its expansionist ambitions for a good while yet. The company has a current net cash balance of about $4.5 billion, plenty to see it through the short-term at least.

The company is doing everything right, and should soon become profitable. The increasing digitalization of the economy is not going to slow down, and Sea Limited’s diverse business segments will be there to capitalize on it like no other company in the space.

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