Sea Stock: Down 43% From Its High, is a Buy Now?

Seeking Alpha2021-12-20

Summary Sea Limited stock has been battered recently as growth stocks sold off massively in the market. However, we believe that the fundamental thesis on its rapid growth remains robust. We discuss ...

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Comments

HengHuat
2021-12-21
HengHuat
Will they pull out under their own country pressure?
CCCH
2021-12-20
CCCH
Yes, waiting to buy at $200 supporting level
SanWangtikup
2021-12-20
SanWangtikup
👌
Portfolio50
2021-12-20
Portfolio50
The bigger it grows, the more money it losses. Such companies will see further correction. So wait for it first.
- Viboon:
  👍
Vandaluus
2021-12-20
Vandaluus
It is definitely a Buy, but i'm not sure if we won't a lower entry price in Jan 2022.
- Oldie:
  Well said
Maxeyme
2021-12-20
Maxeyme
No, not anytime soon

Leave a comment

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Since its recent all-time high (ATH) in October, its price has dropped by a dramatic 43%. Many reasons have been presented on why the stock has fallen. We exhort investors not to read too much into them. We believe nothing material has changed from its fundamental thesis. The stock has had a remarkable run in 2021 relative to its gaming peers or e-tailer peers. Therefore, profit-taking of this extent should not be surprising as fear struck growth stocks.\nMoreover, the recent significant correction in growth stocks across the market has also hit SE stock hard. But, we are not concerned. Significant volatility will always be a factor influencing the performance of growth stocks like SE in the short term.\nNotably, we observed that the consensus target price on SE stock had been revised upwards since its FQ3 report card. Moreover, the gap between its price target and its current stock price has been greater than its last significant correction in April/May.\nOur internal DCF valuation model also points to a stock that is now significantly undervalued. Thanks to the market's myopia, we have been presented with another fantastic opportunity since April/May to add SE stock with great fervor again.\nWe discuss why we think investors should not miss this incredible opportunity to add exposure to an outstanding growth stock.\nSE Stock YTD Performance\nSE stock YTD performance (as of 17 December'21).\nAs a result of the significant correction recently, SE stock's YTD return has dropped to 6.9%, thus underperforming the market. Notably, its YTD gain was as high as 80% in October/early November. Despite that, the stock is still outperforming its e-tailer and gaming peers, as shown above.\nSea Stock Estimates Have Consistently Been Revised Upwards\nSea Limited revised revenue mean consensus estimates. Data source: S&P Capital IQ, Seeking Alpha\nReaders can quickly observe that the company's revenue consensus estimates for FY21-23 have consistently been revised upwards over the last five months. These revisions lend credence to the robust growth prospects of the company over the next two years. Notably, Sea Limited's revenue is estimated to increase at a phenomenal CAGR of 42.8% through FY23.\nThere were concerns over the growth rates of its Garena gaming arm in its FQ3 report card.We also explained in our previous article that Sea Limited has clearly explained that investors should expect normalization in Garena's growth after two spectacular years. However, its monetization capability continues to dazzle. Therefore, we are confident that Garena can continue its robust monetization strategies moving forward.\nMoreover, data from Sensor Tower's recent gaming statistics continue to point to sturdy performance from its Free Fire game. It continues to be ranked among the top ten mobile games in terms of overall gaming revenue in November. Moreover, it's also ranked#2 in overall downloadsacross both the App Store and Google Play. Notably, it's also among eight games globally whose annual revenue crossed $1B as of 14 December. Therefore, we think the sentiments and chatter about Free Fire's \"one-shot wonder\" have been overblown.\nGlobal games market forecast. Source: Google, Newzoo\nIn addition, the global gaming market is estimated to experience a slight decline to $175.8B after last year's massive 23% growth to $177.8B. However, given Garena's impressive growth in FY21 despite the decline in the global market, we believe it validates its business model and prospects. Notably, the gaming market is expected to reverse its decline moving forward. Therefore, Garena's leadership in mobile gaming could continue to propel its growth underpinned by the recovery in the global gaming market.\nShopee adjusted EBITDA per order. Data source: Company filings\nBut, some investors may have been spooked by Shopee's (Sea Limited's e-commerce arm) continued expansion into new geographical markets. Notably, Shopee continues to report adjusted EBITDA loss per order, as shown above. Therefore, some investors might have been concerned about whether the company's plate is getting too much to handle. Over the last three months, the company has entered into new markets such as India, France, Spain, and Poland. They are in addition to its battle with MercadoLibre (MELI) in Latin America, particularly Brazil. As a result, there are concerns on whether Sea Limited could continue its adroit execution in these markets while still making losses. We believe such concerns are valid. However, Sea Limited has shown its tremendous capability in penetrating the most important markets where the incumbents have strong leadership. It includes Lazada (BABA) in Southeast Asia, MercadoLibre in Brazil, and Tokopedia in Indonesia. Shopee was never the first-mover. But, it took advantage as the \"late-comer\" as it sought to compete with the incumbents. It's important to note that Sea Limited is not averse to competition. It has thrived against the incumbents and has made the e-commerce space in these geographical regions much more competitive.\nSea Limited revised adjusted EPS mean consensus estimates. Data source: S&P Capital IQ, Seeking Alpha\nNevertheless, the road towards profitability might be stretched further due to its e-commerce expansion. Readers can quickly glance over the chart above, where its adjusted EPS estimates have been revised downwards through FY23 over the last five months. However, we believe that if you are a long-term investor with a five-year horizon at least, it's not a cause for concern. Earlier investors in Sea Limited can keenly recall the company's massive adjusted EBITDA per order losses, as seen in the previous chart. Shopee has scaled tremendously over the last five years and has improved its operating leverage further. But, it's important to note that it takes time to scale up. Therefore, earlier losses in new geographical markets are expected. But, management has demonstrated its execution capability over the last three years. Considering its much reduced adjusted EBITDA losses over the previous few years, we believe that Shopee is even better positioned than before to navigate its expansion.\nSo, is SE Stock a Buy Now?\nSE stock EV/NTM Revenue 4Y mean.\nSE stock is trading at an EV/NTM Revenue of 8.3x. Therefore, it has brought it back to its 4Y NTM revenue multiple mean of 8.6x. We believe there's a fantastic opportunity right now as the market has undoubtedly overreacted. As demonstrated clearly, SE is still expected to generate massive revenue growth moving ahead, even though it means the road to profitability gets further extended.\nConsidering its FY23 revenue estimate, SE stock is trading at just 5.8x FY23 revenue. No one can accurately predict where the stock will be headed over the next few months. But, we think it represents a tremendous opportunity right now.\nSE stock price target Vs. actual price trend. Source: Seeking Alpha\nMoreover, readers can observe that the valuation gap between SE stock's consensus price target (PT) of $405.87 and its current price has never been more significant in a while. It's even more pronounced than its last significant correction in April/May. Notably, the consensus price target has been revised upwards despite the so-called \"gaming headwinds.\" And, if you look at the price chart, SE stock price has followed the revised PT trend very consistently over time. Therefore, the current price could be one of the most significant discounts you could observe in a long time.\nSE stock DCF valuation model. Data source: S&P Capital IQ, company filings, author\nOur DCF model also shows that SE stock is now significantly undervalued with an implied fair value of $371.46. We have also used reasonable estimates in our model. Moreover, we believe that SE will continue to gain significant operating leverage as it scales in the new markets. We estimate that its adjusted EBITDA margins could reach 15% by FY25.\nLastly, the stock is also testing a critical support level that has strongly underpinned the stock's advance since early 2021. Therefore, there are sufficient reasons to believe that the current entry point to add exposure to SE stock seems very attractive now.\nConsequently,we revise our rating on SE stock to Strong Buy.","kind":null,"is_publish_news":true,"is_publish_highlight":true,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":693545601,"gmtCreate":1640053732507,"gmtModify":1676532396583,"author":{"id":"4089527924629590","authorId":"4089527924629590","name":"HengHuat","avatar":"https://static.tigerbbs.com/5854d1323f59ffe9e66dca6d58fd6af8","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"Will they pull out under their own country pressure?&nbsp;","listText":"Will they pull out under their own country pressure?&nbsp;","text":"Will they pull out under their own country pressure?","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/693545601","repostId":1109541249,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"},{"id":693836421,"gmtCreate":1639997616773,"gmtModify":1676532385921,"author":{"id":"3579259217271611","authorId":"3579259217271611","name":"CCCH","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"Yes, waiting to buy at $200 supporting level&nbsp;","listText":"Yes, waiting to buy at $200 supporting level&nbsp;","text":"Yes, waiting to buy at $200 supporting level","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/693836421","repostId":1109541249,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"},{"id":693831377,"gmtCreate":1639996985892,"gmtModify":1676532385846,"author":{"id":"4087452914358580","authorId":"4087452914358580","name":"SanWangtikup","avatar":"https://static.tigerbbs.com/c7f061d50a9f915d0ce8e8c879871960","vip":1,"hat":"https://static.tigerbbs.com/b073a07f77dbe6b3bec6b12311fde6bd","crmLevel":2,"crmLevelSwitch":0},"htmlText":"👌&nbsp;","listText":"👌&nbsp;","text":"👌","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/693831377","repostId":1109541249,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"},{"id":693125320,"gmtCreate":1639989923756,"gmtModify":1676532384123,"author":{"id":"3579922554249988","authorId":"3579922554249988","name":"Portfolio50","avatar":"https://static.tigerbbs.com/3e41399b7d47310e4bf55e2a5917c9da","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"The bigger it grows, the more money it losses. Such&nbsp;companies will see further correction. So wait for it first.&nbsp;","listText":"The bigger it grows, the more money it losses. Such&nbsp;companies will see further correction. So wait for it first.&nbsp;","text":"The bigger it grows, the more money it losses. Such companies will see further correction. So wait for it first.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/693125320","repostId":1109541249,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":7054092,"gmtCreate":1639994673398,"gmtModify":1639994673398,"authorId":4087270675600580,"author":{"id":4087270675600580,"authorId":4087270675600580,"name":"Viboon","avatar":"https://static.tigerbbs.com/5d09f36a9730d96a3396498f4bc5453b","vip":1,"crmLevel":4,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":693125320,"type":1,"supId":0,"prevId":0,"content":"👍","text":"👍","html":"👍"}],"langContent":"CN"},{"id":693128953,"gmtCreate":1639989460672,"gmtModify":1676532384042,"author":{"id":"4097909991277410","authorId":"4097909991277410","name":"Vandaluus","avatar":"https://community-static.tradeup.com/news/84f4e9fca5098e480cb3203e985b09cc","vip":1,"crmLevel":4,"crmLevelSwitch":1},"htmlText":"It is definitely a Buy, but i'm not sure if we won't a lower entry price in Jan 2022.","listText":"It is definitely a Buy, but i'm not sure if we won't a lower entry price in Jan 2022.","text":"It is definitely a Buy, but i'm not sure if we won't a lower entry price in Jan 2022.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/693128953","repostId":1109541249,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":7054797,"gmtCreate":1640001321888,"gmtModify":1663238950463,"authorId":3584415246670106,"author":{"id":3584415246670106,"authorId":3584415246670106,"name":"Oldie","avatar":"https://static.tigerbbs.com/09a7a0c9fe9b5b416d6f049746ddfa29","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":693128953,"type":1,"supId":0,"prevId":0,"content":"Well said","text":"Well said","html":"Well said"}],"langContent":"CN"},{"id":693161470,"gmtCreate":1639987434334,"gmtModify":1676532383806,"author":{"id":"3585641054025604","authorId":"3585641054025604","name":"Maxeyme","avatar":"https://static.tigerbbs.com/2f6534bff6e2d250aa9f9f44575fda56","vip":1,"crmLevel":5,"crmLevelSwitch":0},"htmlText":"No,&nbsp;not anytime soon","listText":"No,&nbsp;not anytime soon","text":"No, not anytime soon","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/693161470","repostId":1109541249,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":319,"commentSize":62,"repostSize":0,"favoriteSize":9,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1109541249"}