Why Did Sea Limited Stock Go Up?

It’s been a dreadful 6 months for Sea Limited (NYSE:SE) with the company’s share price chopped in half but signs of green shoots are appearing.

Over the last month alone, SE share price has gone up by 17% which invites the question why?

Why Did Sea Limited Stock Go Up?

Sea Limited has has climbed higher recently because of its appealing valuation at this time. Whereas Sea Limited once traded well above fair value, it currently sits well below analysts’ price targets.

Of the 33 analysts covering the stock, the consensus estimate is $65 per share. A discounted cash flow forecast analysis suggests that Sea’s intrinsic value sits closer to $58 per share, representing upside of 33.0%.

Another reason the stock has rallied is that the Indonesian government enacted e-commerce restrictions on its rival TikTok.

Investors were buoyed by news that the regulatory restrictions would hinder TikTok’s ability to integrate e-commerce into its platform. Slower growth from its rival but would bolster Sea Limited’s ambitions to capture market share and grow revenues.

The reason the news is so noteworthy is because Sea Limited earns a majority of its revenues from its e-commerce division.

But valuation and favorable regulatory moves aren’t the only reasons to be optimistic about the potential for Sea.

3 Reasons To Be Bullish On Sea

The top and bottom line forecasts for Sea are very positive. Revenues are expected to climb from $12.7 billion in this fiscal year to $15.8 billion by 2025.

Earnings per share are largely expected to track that top line growth with EPS estimates of $2.46 this year rising to $3.27 within a couple of years.

Beyond splendid future forecasts is an impressive historical track record. Year-over-year revenue growth has been scintillating over the past years

• 2018: 99.7%
• 2019: 163.1%
• 2020: 101.1%
• 2021: 127.5%
• 2022: 25.1%

The slowdown in fiscal year 2022 spooked investors and sparked a selloff  but the financials have stabilized and the stock has rebounded over the past month.

What’s clear is management has over-delivered on the top line growth metric, stunning Wall Street analysts again and again.

Initially, it also impressed discerning investors like Stan Druckenmiller, who was an early buyer before the stock rallied from lows around $40 per share in 2020 to highs above $340 per share a year later. It should be noted that Stan subsequently closed his position this year for his Duquesne Family Office.

Over and above the upbeat forecasts and proven history of revenue growth, a third reason to be bullish on Sea Limited is its healthy balance sheet.

The company has just over $5.6 billion liquid reserves, which is offset by $4.5 billion debt. The deep well of liquidity into which management can tap acts as a moat against incumbents and provides a long runway of capital to invest in expansion initiatives.

What to Look For?

Two key metrics are worth paying close attention to for prospective Sea Limited investors, levered free cash flow and operating income.

Over the past 5 years, we couldn’t find two consecutive quarters where levered free cash flow was positive, except for the last two. That’s a really positive sign that Sea Limited is turning a financial corner to a brighter cash flow future.

Another key metric is operating income, which finally went positive too. Over the past 5 years, every single quarter operating income was negative except for the past 3 quarters where it turned and remained positive. 

After flipping from negative to positive profitability, Sea Limited is a much more compelling investment opportunity than it was when, quarter after quarter, it posted negative operating income and earnings per share numbers.

The fly in the ointment, obviously, is the slowdown in revenue growth but there, too, investors may want to leave Sea with some wiggle room to outperform because the top line has virtually doubled from the fourth quarter of 2020 to the most recent quarter.

By no means is Sea Limited underperforming, it’s simply running into a challenge of the Law of Large Numbers. Following a sequence of triple-digit percentage year-over-year quarterly growth reports, it ran into headwinds to deliver the same percentage increases, though in absolute terms, the numbers remain very impressive. 

For example, quarterly revenues of $3 billion translate to an annualized run rate of $12 billion with EBIT on pace to hit close to $1 billion this year for the first time in the firm’s history.

The Long & Short Of Investing in Sea Limited

Sea Limited has been a roller coaster ride over the past 3 years in particular, rising from lows of around $40 to highs over eight times that amount and back down to the $40 region again.

In spite of the price swings, management has been delivering exceptionally well, growing revenues and turning the profitability corner finally.

On key metrics like earnings per share, operating income and levered free cash flow, Sea Limited has flipped from red to green. That in turn should translate to a stronger balance sheet in the coming quarters and years, which should further widen the company’s economic moat.

Further supporting a bullish thesis is the company’s valuation, which seems low according to a 5-year discounted cash flow forecast and undervalued by analysts’ estimates too.

The forecasts for revenue growth and earnings per share all lean bullish over the next two years. Add to those tailwinds a regulatory headwind for one of its arch-rivals and you’ve got a recipe that’s perhaps too tasty to ignore.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.