Sea Limited Stock Has Huge Potential, but Wait for the Pullback

Sea Limited (NYSE:SE) operates e-commerce websites for Southeast Asian countries and Taiwan and provides online video games in Latin America and Southeast Asia. The company is growing extremely rapidly and has tremendous potential. I believe that SE stock will perform very well over the long-term.

SEA Limited - Shopee app on mobile phone

Source: Muh.Imron / Shutterstock.com

However, given the shares’ unfavorable short-term and medium-term outlook, I advise investors to wait for a meaningful pullback in the name before buying the stock.

In the fourth quarter, Sea’s top line jumped 102% year-over-year (YOY) to $1.6 billion. Its gross profit also soared 102% to $534 million. For all of 2020, the company’s revenue jumped more than 100%, while its gross profit jumped 123%. Moreover, Sea’s EBITDA, excluding certain items, came in at $107 million, versus -$179 million in 2019.

Both Sea’s video games and e-commerce units are performing very well.

In Q4, bookings for the company’s video-game unit, Garena, jumped 111% YOY, and its adjusted EBITDA soared an incredible 149% YOY to $663.5 million.

Similarly, last quarter, the gross margin volume of Shopee, Sea’s e-commerce unit, rose 113% YOY to $11.9 billion.

On a negative note, Shopee’s adjusted EBITDA last quarter came in at -$427.5, down from -$306 million during the same period a year earlier. However, its adjusted EBITDA loss per order fell 41% YOY to 41 cents.

For 2021, Sea, at the midpoint of its guidance ranges,  predicted that Garena’s booking would climb 38% and anticipated that the top line of Shopee would surge 112%.

Long-Term Potential and SE Stock

The average annual real GDP growth of Southeast Asia, Sea’s core geographic market, is expected to come in at 5.1% in 2021, the intergovernmental Organisation for Economic Co-operation and Development (OECD) reported. In 2020, the region’s real GDP fell 3.4%.

Given the region’s likely strong economic expansion this year and Amazon’s failure to gain much traction there, along with Shopee’s powerful growth, Sea’s e-commerce business is very well-positioned over the longer term.

Although Shopee’s overall profitability dropped last quarter, its per-transaction EBITDA increased, indicating that the unit’s bottom line is poised to climb as it grows and the region’s economy rebounds.

What’s more, the company’s video-game unit clearly understands the secret sauce necessary to develop hit mobile video games and should also benefit from Southeast Asia’s economic growth. Consequently, Garena should, in the long-term, generate strong revenue and profit growth.

On Feb. 2, Credit Suisse increased its price target on SE stock to $285 from $225, citing its belief that the company’s video-game and e-commerce businesses will continue to grow rapidly.

As economies reopen and interest rates climb, investors are shying away from high-growth tech stocks in general and e-commerce names and video-game makers in particular. Sea is no exception, as its shares have fallen 17% over the next month.

With both interest rates and reopenings poised to continue to advance going forward, SE stock is likely to fall meaningfully for at least the next month or two.

The Bottom Line

In light of Sea’s strong position in e-commerce and video games, along with the positive economic outlook of Southeast Asia, the company has a very bright future.

Given those positive catalysts, the company’s market capitalization of $120 billion actually does not seem very high at all. Consider that Amazon’s market capitalization is $1.5 trillion, while Alibaba’s is $621 billion.

But nervousness over reopenings and higher interest rates are highly likely to push down Sea’s stock further in the near-to-medium term. Consequently, investors should wait for a better entry point before pulling the trigger on this very promising stock.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.


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