To The Moon

Sea Limited: Riding This Wave

Sea Limited (NYSE:SE) $Sea Ltd(SE)$ recently reported a challenging Q2 with revenue and adjusted EBITDA coming in below expectations given the ongoing macro pressures on their business.

The biggest disappointment during the quarter was the company suspending guidance for their E-Commerce segment in addition to the company reported ongoing declines in their Digital Entertainment quarterly active users and quarterly paying users.

To no surprise, the company's stock was down over 10% on disappointing earnings and guidance suspension, which brings the year to date pulldown to 65%.

Yes, the macro environment remain very challenged and there is still a lot of uncertainty that may take several quarters or months to play out.

Currently, Sea trades at 3.5x forward revenue, which is pretty similar to the recent range of 3-4x forward revenue. The combination of challenging macro, revenue deceleration, and ongoing adjusted EBITDA losses makes it difficult to see multiple expansion in the near-term.

However, long-term investors should remain confident in the outlook and could view this recent pullback as a buying opportunity.

While estimates for 2022 and 2023 revenue likely come down over the next few weeks given the macro uncertainties, valuation has pretty much stalled at 3-4x forward revenue. The stock currently trades around 3.5x forward revenue and it seems possible that valuations remains stuck in this recent trading range until the company executes on their improved efficiency strategy.

By no means is 3-4x forward revenue an expensive multiple to pay, the combination of decelerating revenue, a challenging and uncertain macro environment, and ongoing adjusted EBITDA losses makes it challenging to justify a higher multiple.

Longer-term investors are likely to remain rewarded if they hold onto their position throughout this volatility, but indeed there is likely to be ongoing volatility over the coming months and quarters.