For Now, Sea Limited Stock Is a Falling Knife

Over the long term, Sea Limited (NYSE:SE) stock – propelled by the company’s strong, rapidly growing e-commerce, financial services and video game businesses – should deliver very impressive financial results. But in the short and medium term, for a variety of reasons, SE stock is likely to get little affection from the Street.

The logo for Sea Limited (SE) is seen on a web browser through a magnifying glass.
Source: Postmodern Studio / Shutterstock.com

Moreover, despite the huge, recent decline of the shares, their valuation remains quite elevated.

Rapid Growth and a Positive Long-Term Outlook

Sea Limited’s three largest business – e-commerce, digital financial services, and video games – all appear to be doing very well.

In the third quarter, the gross orders of its e-commerce unit soared 123% year-over-year to $1.7 billion, while its gross market volume jumped 81% to $16.8 billion. In financial services, its total payment volume climbed 111% to $4.6 billion, while the number of its paying users soared 120% from a year ago.

The performance of Sea’s video game business was less impressive, but its quarterly active user base still rose 27% from a year ago to 729 million, while its bookings increased 29% to $1.2 billion and its EBITDA, excluding certain items, rose 22% to $715 million.

So, despite the challenges to all of these businesses and the difficult year-over-year comparisons created by the easing of the pandemic, the growth of all three ranged from quite respectable to tremendous.

Overall, Sea’s sales jumped 122% from last year, reaching $2.7 billion, while its gross profit surged 148% to $1 billion.

Moreover, there are multiple signs that the company has become very adept at expanding its e-commerce business to new markets. For example, the company has already had some success in Brazil, which is, of course, quite far away and very different from Sea’s home base in Southeast Asia.

During Sea’s Q3 earnings call in November, CEO Forrest Lit said, “More than 1 million local sellers in Brazil have registered with {Sea’s e-commerce website) since we started welcoming local sellers in mid-2020.”

Meanwhile, Sea’s e-commerce unit is continuing to move into new geographic markets, as it has recently expanded to Poland, France, Spain and India, Li reported.

Short-Run Issues

Obviously, the market is currently not very enchanted with tech in general and any tech businesses seen as benefiting from the pandemic in particular these days. Unfortunately for Sea, the company’s three main businesses are all in the latter category.

Two other characteristics that the Street does not like at all these days are lack of profitability and a high valuation. Sea has both of these characteristics as well.

In Q3, for example, its net loss came in at $425.26 million. While that loss was 34% better than the $571 million it shed during the same period a year earlier, the company still obviously lost a great deal of money.

On two positive notes, the company’s operating expenses dropped to $713 million in Q3 from $1.45 billion in the year-earlier period, while its EBITDA, excluding certain items, climbed to positive $120.4 million from a loss of $165.45 million.

Nevertheless, large investors are still likely to view Sea as an unprofitable enterprise.

And on the valuation front, SE stock is changing hands for nearly 15x Sea’s trailing 12-month revenue. That’s way down from the stock’s valuation of 23.6x trailing sales as of Sept. 30, but it’s still a very high price to pay for the shares.

The Bottom Line on SE Stock

Sea is rapidly growing and has tremendous long-term potential. But as shown by the fact that its shares tumbled by 33% in the last month, it’s not a good stock to buy in the current market.

As a result, rather than try to catch this falling knife, investors should wait for the market’s attitude towards names like SE stock to improve before taking a bullish position in it. Those who follow that advice will almost certainly get a better price and sleep more easily at night than those who don’t.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, Ford, solar stocks, and Exxon. You can reach him on StockTwits at @larryramer. 


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