Solid Revenue Growth Won’t Save Sea Limited Stock as Net Losses Widen

Sea Limited (NYSE:SE) has business operations related to digital entertainment, e-commerce and digital financial services. While involvement here helped power SE stock higher in 2020, things have since gotten a bit more rocky for the shares. In fact, SE has charted a 45% loss year-to-date. Although some stock dips offer opportunities, I suggest investors avoid the stock today for three reasons: widening net losses, weak FY 2022 guidance for its digital entertainment business and issues with its valuation.

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Let’s take a closer look at why each of these three factors mean investors should avoid Sea Limited stock for now.

Sea Limited: Strong Growth, Net Losses

Sea Limited reported revenue growth of 106% for Q4 2021 and full-year 2021 sales growth of 128%. A triple-digit GAAP revenue growth is a remarkable milestone. However, this earnings report was a mixed one, as earnings-per-share GAAP of -$1.12 was a miss by 7 cents and revenue of $3.22 billion was a beat by $234.37 million.

Some of the Q4 2021 highlights include a 145.6% year-over-year increase of total gross profit to $1.3 billion. Digital Financial Services showed the highest revenue growth across all segments: 711.1% year-over-year growth to $197.5 million.

Turning to full-year 2021 financial results, total gross profit was $3.9 billion, up 188.8% year-over-year. Again, Digital Financial Services showed the largest year-over-year growth (672.8% to $469.8 million), followed by e-commerce GAAP revenue of $5.1 billion (a 136.4% year-on-year increase) and a growth of 114.3% year-over-year for Digital Entertainment GAAP revenue of $4.3 billion.

It is also very positive to read that Sea Limited has shown growth across all its segments every quarter as of 4Q 2020.

Digital Entertainment bookings have declined in Q4 2021 but the trend of revenue growth for E-commerce and Digital Financial Services is both positive and promising for the future of Sea Limited.

What is not positive and a key factor sending shares of this fintech company plunging in 2022 is profitability. As investors have realized, high growth stocks may be out of favor if their valuations are rich and do not deliver profits in 2022. After all, there is already a shift in safety due to geopolitical risks and Sea Limited has missed a huge opportunity.

General and administrative expenses, sales and marketing expenses, research and development expenses have all increased year-over-year and have widened the net loss to $616.3 million in Q4 2021 versus $524.6 million in Q4 2020. For the full year, its 2021 net loss widened 25.8% to $2.04 billion.

For a public company, a mixed earnings report is not ideal for its stock price, but what can become worse is providing weak fiscal year guidance.

Weakness in Digital Entertainment Bookings

For FY 2022, the firm anticipates weakness in Digital Entertainment Bookings to be in the range of $2.9 billion to $3.1 billion compared to Bookings of $4.6 billion, in 2021. This is a decline by nearly 35%. This is worrisome because the Digital Entertainment segment was the only segment that reported a positive operating income and total profitability is expected to get another hit.

For the remaining two segments, the expected growth for e-commerce GAAP Revenue is 75.7% and for Digital Financial Services GAAP Revenue is 155.4%.

SE Stock Remains Too Pricey

Sea Limited shareholders have been diluted in the past year, with total shares outstanding growing by 9.8%. That is bad news for its valuation. SE stock is relatively overvalued based on its price-to-book ratio (6.9x) compared to the U.S. Entertainment industry average (1.6x). The price-to-cash flow ratio of 570.89x is also at an extremely unattractive level.

It is indeed a great disappointment that Sea Limited, despite its 3-digit revenue growth for 2019, 2020 and 2021, has not been profitable. Otherwise, SE stock could have been a great growth stock to consider. It remains a growth stock to monitor, but not a buy as it lacks any progress in profitability. Without finding the way to navigate into net profits, Sea Limited should continue to see its shares under pressure. Be aware of this as bargain growth stocks can get much cheaper for all the reasons mentioned.

On the date of publication, Stavros Georgiadis, CFA  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.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.


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