Sea Limited: Analysis By An User

seekingalpha02-01

Sea Limited operates three core businesses: Garena, Shopee, and SeaMoney, focusing on digital entertainment, e-commerce, and digital payments and financial services.Garena's revenue has been declining...

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Kekemon
02-01
Kekemon
Like that say means got chance to cheong le. Attack.
Ohshi
02-01
Ohshi
It's sad to hear that.... Reload below $35[Happy]
iNkwiziTs
02-01
iNkwiziTs
Laggers with huge upside potential.

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More than a 5% net income margin seems unlikely in this business.kokkaiInvestment ThesisI am a user of Sea Limited's (NYSE:SE) main revenue generator, the e-commerce store Shopee. I like the app and am optimistic about its future, but I am still cautious about investing in the share. Currently, the company is still on the verge of profitability, which means the investor suffers from large fluctuations in the share price and an increasing number of outstanding shares. Generally, the stock valuation is challenging as it is not possible to calculate a P/E ratio. My alternative calculation, which assumes a future net income margin of 5%, shows that the valuation is not attractive enough to enter here.Company OverviewThe company was founded in 2009 and is headquartered in Singapore. It is active throughout Southeast Asia with the online store Shopee and the financial business. The gaming division is accessible worldwide.Our mission is to better the lives of consumers and small businesses with technology. We operate three core businesses across digital entertainment, e-commerce, as well as digital payments and financial services, known as Garena, Shopee, and SeaMoney, respectively.Sea Limited, company profilesea limitedThe past: Financial Progress & TrendsFirst, a short overview over a more extended period for revenues, expenses, and net income.Data by YChartsI have created this overview of the income statement of the last quarter compared to the previous year, showing where money is spent and how the revenue and cost development is YoY.authorOverall, the figures are not very impressive, and revenue growth, in particular, has been stagnant for several quarters. But the company has also reduced its costs significantly, resulting in a lower overall loss than the previous year. Sea Limited has been on the verge of profitability for around five quarters. Compared to 2022 and before, this is still a positive development overall, as the company had never made any profit during this time.Their three segmentsUndoubtedly, many readers are already aware of the various developments in SE's three segments. However, this analysis would not be complete without looking at these three segments separately.GarenaGarena is the developer and publisher of Free Fire, a popular mobile battle royale game. Free Fire is one of the largest mobile games in the world.sea.comThe company owes its rapidly rising revenue from 2022 onwards primarily to this area. However, as the pandemic flattened out more and more, user numbers and, thus, revenue also fell. Since 2022, however, user numbers have tended to remain relatively constant or fall only slightly, but the number of paying users has decreased, as seen in the following chart. In the last quarter, this segment saw a slight increase in revenue for the first time.Investor presentationGiven the total quarterly revenue of over $3.3B, this segment has lost its great importance. Of course, the company is still trying to squeeze out as much money as possible, but the focus has shifted to the other segments.ShopeeThis is the big online marketplace, the Amazon of Southeast Asia, so to speak, or at least is intended to become so. This is where SE now generates most of its sales: $2.2.B last quarter (+16.2% YoY). SE divides this revenue further into two areas.Core marketplace revenue, mainly consisting of transaction-based fees and advertising revenues, was up 31.7% year-on-year to US$1.3 billion. Value-added services revenue, mainly consisting of revenues related to logistics services, was down 4.2% year-on-year to US$592.8 million.Q3 ResultsShopee is still relatively young. Singapore was its first market in 2015 and since then expanded into numerous Southeast Asian countries: Indonesia, Malaysia, Thailand, Taiwan, Vietnam, and the Philippines. Sea Limited has, therefore, made clever use of the pandemic. They used the money from the Garmena segment boom and the general stock-market hype to raise a lot of money to push Shopee. In the meantime, the company has freed itself from its dependence on the gaming sector. This is very pleasing for investors, as online games are volatile and fast-moving. A well-known online store is better suited for sustainable revenues.However, it must be said that this segment is still clearly unprofitable, although the figures are improving. The following chart shows only the e-commerce area.Investor presentationSeaMoneySeaMoney offers various digital financial services and products including mobile wallet services, payment processing, credit, banking, and insurtech.sea.comI will cover this area quickly; fortunately, it is growing strongly and steadily. This segment now generates just as much revenue as the gaming division.Seeking AlphaMy experience with ShopeeI have spent 5 of the last 12 years in Southeast Asia and witnessed the development of e-commerce firsthand. About ten years ago, there was virtually no e-commerce, and it has only started to appear since the pandemic. Even now, the percentage of the online shopping population is significantly lower than in Western countries.For example, in 2018, I wouldn't have even thought of ordering anything online in Thailand or Malaysia. It's different now, and that's how many people feel. There is quite a duopoly in most countries: Shopee and Lazada.My assessment of Shopee has nothing to do with my stock analysis. Although I have tried both and can't say why, I only order from Shopee nowadays. Lazada seems even more chaotic and annoying with pop-ups. However, Shopee is also too packed for my taste: the navigation and search work well, but there's too much on the screen. Nevertheless, I like the app overall, and several Thai people I know also prefer Shopee to Lazada.The present: Valuation & current developmentsThe company is currently valued at an enterprise value of $21.8B. The market cap is $23B, which means the company has more cash than debt. It isn't easy to assess the valuation as the company is not yet profitable in the long term. In my opinion, the analysts' figures for forward PE are relatively worthless, as we don't even know whether the company will be profitable at all in the next 12 months. Also, these are non-GAAP numbers, which often look significantly better than the GAAP numbers.Data by YChartsHowever, the PS ratio and the comparison with other e-commerce companies are interesting in this case.Data by YChartsAn example calculation for Sea Limited: With annual sales of $13B (the 2023 number) and a net income margin of 5%, this would result in a profit of $650M. That would be $1.14 per outstanding share, and by my calculation, the P/E ratio would be around 35 at the current share price (Amazon has a 3.6% net income margin and Mercado Libre 7.5%).Let's say in 2027, the revenue is $17B. I leave the margin at 5% as more seems unlikely in the e-commerce sector. Then, the net profit would be $850M, and the P/E ratio on today's share price would be 27. This does not take into account that the number of outstanding shares will probably continue to rise, which is still the case; see below.Also, from $13B to $17B is an annual increase of about 7%, i.e., more than recently. In addition to these points, there are also other risks.RisksOn the one hand, the gaming division is still tending to flatten out (due to a slight increase in the last quarter, we cannot yet speak of a turnaround). It seems more likely that sales will continue to fall rather than suddenly climb back to 2021 levels.The most significant risk overall is the competition. Although e-commerce is a growing market in Southeast Asia and Shopee is currently the leader in many countries, the e-commerce market in Asia is very fast and changing. The following graphic visualizes the emergence of a new potentially powerful competitor due to their already huge user numbers: TikTok.businesstimes.comLazada is part of Alibaba (BABA) and has significantly stronger financial possibilities. New companies could also emerge; Southeast Asia is an exciting market for Chinese companies.Share dilution, insider trades & SBCsFor me, these three things are standard checks I make in every article, as excessive stock dilution and stock-based compensation can put us, shareholders, at a disadvantage. In addition, insider trades sometimes contain valuable info about the confidence of management itself.Data by YChartsI don't know why the SBCs stopped so abruptly in 2022; maybe there is a lack of data at YCharts. I haven't found any information on insider sales either.ConclusionOverall, I am optimistic about the company's future and believe it will achieve sustainable profitability. However, I think my sample calculations have shown that the current valuation is not as attractive as it seems at first glance. Overall, there is not enough potential in the share to take the risk. What risk? We have seen it many times: one bad quarter and the share price drops by 20 %. The e-commerce sector in Southeast Asia is still young, and now TikTok has entered the market too. The outlook for SE´s gaming segment is a guessing game, and Shopee is not yet profitable. For my taste, there are more attractive opportunities in the market.Investor's ChecklistCheckDescriptionRising revenues?yes, but slowingIncreasing over longer periodsImproving margins?the stock hasn´t reached sustainable profitability yetPossible competitive edgePEG ratio below one?noPEG ratio below one may suggest undervaluationSufficient cash reserves?yesVital for the survival & growth, especially of unprofitable companiesRewards shareholders?noReturning capital to shareholdersShareholder negatives?yesActions that disadvantage shareholdersStock in an uptrend?noTrading above its 200-day moving average?","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":269443518882048,"gmtCreate":1706798951413,"gmtModify":1706798955865,"author":{"id":"3575949343225606","authorId":"3575949343225606","name":"Kekemon","avatar":"https://community-static.tradeup.com/news/acc569fb2b4b8cb1641acae354a1df48","vip":1,"hat":"https://static.tigerbbs.com/0a8758340a08196056f8bc1e54805193","crmLevel":7,"crmLevelSwitch":1,"authorIdStr":"3575949343225606","idStr":"3575949343225606"},"htmlText":"Like that say means got chance to cheong le.&nbsp; Attack.","listText":"Like that say means got chance to cheong le.&nbsp; Attack.","text":"Like that say means got chance to cheong le. Attack.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/269443518882048","repostId":2407307245,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":269427881263288,"gmtCreate":1706795278747,"gmtModify":1706795283078,"author":{"id":"3572430379090714","authorId":"3572430379090714","name":"Ohshi","avatar":"https://community-static.tradeup.com/news/2ad654c603e3ee9ca47904f8b9b9f7ae","vip":1,"crmLevel":5,"crmLevelSwitch":0,"authorIdStr":"3572430379090714","idStr":"3572430379090714"},"htmlText":"It's sad to hear that.... Reload below $35[Happy]&nbsp;&nbsp;","listText":"It's sad to hear that.... Reload below $35[Happy]&nbsp;&nbsp;","text":"It's sad to hear that.... Reload below $35[Happy]","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/269427881263288","repostId":2407307245,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":269402008051792,"gmtCreate":1706788815472,"gmtModify":1706788819806,"author":{"id":"3569473957254831","authorId":"3569473957254831","name":"iNkwiziTs","avatar":"https://static.tigerbbs.com/7cfab89f2382be8e231dff17c4383110","vip":1,"hat":"https://static.tigerbbs.com/b0a2963eb37c60c5d6d4a8dbcd266952","crmLevel":5,"crmLevelSwitch":1,"authorIdStr":"3569473957254831","idStr":"3569473957254831"},"htmlText":"Laggers with huge upside potential.&nbsp;","listText":"Laggers with huge upside potential.&nbsp;","text":"Laggers with huge upside potential.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/269402008051792","repostId":2407307245,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":9,"commentSize":3,"repostSize":2,"favoriteSize":5,"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":"4.29.3","shortVersion":"4.29.3","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/2407307245"}