To The Moon

Investment decision Thesis

Sea Restricted (NYSE:SE) reported its FQ1 earnings card to some fanfare as investors cheered its greater than predicted effects. Sea claimed earnings and EPS ahead of consensus estimates in Q1. Even so, the firm also tempered investors’ expectations in its e-commercearm, Shopee, as it widened its assistance selection. Notably, the corporation sees potential headwinds emanating from better inflation, macro dangers, and the reopening of the Southeast Asian economies.

Our evaluation of the consensus estimates indicates that they have been revised downwards thanks to the lackluster performances from its US e-commerce friends recently. We assume the beat was reassuring. But, Sea Constrained is charting a new (slower advancement) section that could be tough to execute, presented the macro and micro headwinds. Thus, we feel the inventory is probable to trade inside of a consolidation selection in the course of FY22 as the sector parses its execution.

Additionally, our selling price action evaluation indicates that the stock could still deal with a likely “greatest” bottom take a look at, with several layers of resistance to impede its re-score. As a end result, we reiterate our Maintain score on SE stock for now, with a selling price target (PT) of $90 (implied upside of 12.5% at composing).

Defeat Consensus, But Widened Assistance Variety for Shopee

Sea Restricted profits improve % and Adj. EBITDA margins % consensus estimates (S&P Money IQ)

Sea Confined EPS consensus estimates (S&P Capital IQ)

Sea noted income of $2.9B, up 64.4% YoY (Vs. Consensus estimates of $2.86B, up 62.1% YoY). Notably, it claimed a lower than envisioned reduction on GAAP and adjusted EPS phrases. Sea posted GAAP EPS of -$1.04 (Vs. consensus estimates of -$1.40) and adjusted EPS of -$.80 (Vs. consensus estimates of -$1.22).

Although the sequential profits development deceleration was concerning, we were being happy with the inflection observed in its EPS metrics. As a end result, we imagine that the consensus estimates (from FQ2 onwards) could be revised subsequently to replicate Sea’s much better than estimated profitability functionality.

Management also continues to be optimistic about accomplishing its authentic steerage of adjusted EBITDA profitability in Shopee (excluding HQ expenditures) in its crucial marketplaces in FY22. Notably, it also emphasised that it could attain altered EBITDA profitability (such as HQ fees) by the conclude of FY23. We feel the commentary is constructive on its route to adjusted profitability even with slowing topline advancement.

But, Important Headwinds Linger On

Garena Bookings (Firm filings)

Garena Adj. EBITDA share of bookings % (Organization filings)

Its money cow Garena proceeds to expertise slowing growth as the economies reopen. Moreover, Sea also highlighted its advancement experienced been impacted by its ban in India. As a result, Garena’s Bookings advancement slumped into adverse territory, at -27% YoY in FQ1. Notably, management was reticent on whether or not they predicted the slowdown to be structural or brief-phrase. It asked for a lot more time to observe the trends, supplied the shroud designed by the reopening cadence. Sea Team CEO Forrest Li accentuated (edited):

As we navigate this speed of moderation, we are targeted on user base stabilization. We noticed some preliminary signs that this is starting off to bear fruit with the every month consumer traits for Totally free Fireplace starting to display some early indications of stabilizing in the direction of the finish of the initially quarter. While these are encouraging symptoms, the extended-expression impression of reopening all over on line gaming and Free of charge Fireplace specifically remains to be witnessed, and we will continue to emphasis on person engagement and consumer foundation stabilization. (Sea Limited’s FQ1’22 earnings simply call)

Shopee GMV (Firm filings)

Shopee Adj. EBITDA for each get (Organization filings)

As a result, with a slowing hard cash cow funding Shopee’s expansion, the market place was justifiably worried about the effect of Sea’s loss-earning e-commerce unit. But, management reiterated that Shopee has ongoing to attain running leverage as it expands its larger-margin providers in transaction-primarily based costs and advertising and marketing. Moreover, it also continues to get operating efficiencies in scale even as its gross orders fell from $2B in FQ4 to $1.9B in FQ1.

As viewed previously mentioned, Shopee’s altered EBITDA reduction for each get improved to -$.40 in FQ1. However, we remained anxious with its e-commerce guidance as administration widened its steering assortment. Sea Limited’s revised FY22 steerage sees Shopee posts income amongst $8.5B to $9.1B. It was revised from its earlier guidance of $8.9B to $9.1B. At the midpoint of its assistance, Shopee is expected to publish earnings of $8.8B (up 71% YoY), down from $9B (up 75.7% YoY).

As a result, with slower topline growth, it could influence Shopee’s means to provide its path to modified EBITDA profitability. Hence, we urge buyers to carefully check its development over the up coming several quarters.

Is SE Stock a Obtain, Promote, or Hold?

SE stock price tag chart (TradingView)

SE inventory NTM FCF yields % and NTM normalized P/E (TIKR)

SE inventory still trades at unfavorable normalized P/E and FCF yields. For that reason, buyers ought to have large conviction above the firm’s skill to scale up Shopee when turning the corner in Garena. Even though Sea Dollars has manufactured encouraging development, we think it is not sizeable more than enough to transfer the needle. Garena and Shopee will go on to travel the momentum in SE inventory in the in close proximity to term.

In addition, our value motion analysis of SE stock displays terribly ruined technicals, stuffed with a sequence of astute bull traps. On top of that, these traps are also overlaid with a number of crucial layers of resistance that could impede SE stock’s recovery momentum shifting ahead.

While we you should not consider buyers should really bail out of SE stock now, we do not see a properly-balanced threat/reward profile now for SE stock possibly. Therefore, we urge traders to bide their time and wait for a consolidation phase prior to incorporating exposure.

We reiterate our Maintain rating on SE inventory with a PT of $90.

Source: Seeking Alpha

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