- Sea Limited (SE) stock potentially has a substantial reversal rally.
- It has excellent financial metrics to help with its recovery efforts.
- The negative momentum will not continue for ever.
Volatility has been lingering on Wall Street for a while. The threats have not been the same, but they have persisted for different reasons. This has caused choppy equity price action in general. But for a handful of special stocks like Sea Limited (NYSE:SE) stock, it has been murder. SE stock’s trajectory has been near a free fall. But there are signs that this bearish cycle is coming to an end. If that’s the case, then the reversal upside potential in it should be impressive.
It is also important to realize that much of the gains have already happened. The bounce from $86 per share was violent. SE rallied 60% in a month, so it could stall a bit. But this won’t change the direction of the next leg to follow. The bulls may be in the process of taking the reins from the bears for a while. This, of course, will require that the indices don’t add to the difficulty by correcting.
For now, it is safe to assume that this push-and-pull price action will persist on Wall Street. Meanwhile, the macroeconomic conditions are somewhat stable, and facing consistent headwinds. Additionally, the geopolitical threats are not abating just yet. Those are likely to be stagnant at best for weeks to come.
SE Stock Woes Are Temporary
For SE stock, it has been a case of one step forward and two steps back. Since it peaked last year, the bears successfully sold ever rally effort. This was the case for many similar high-growth companies. They rallied incessantly out of the pandemic, only to face a massive corrective phase ongoing now. Investors who chased late had to relearn the important lesson of what goes up must also come down, eventually.
Stocks can’t break the laws of physics for too long. However, SE stock deserves to make progress over time. Therefore, my assumption is that the $100 base it just established should be durable. The unfortunate part is that it has already bounced so much off of the March lows. Although this is not the end of the rally in the long term, for now it might struggle a bit.
Judging SE by its financial statements I can confidently say things look great. The amount of growth they deliver is astonishing for revenues and gross profit. Since 2015, the business grew 34 times. What’s working against it though is the fact that they still carry a substantial net loss. However, I find comfort that they have a positive cash flow from operations. At least they’re not hemorrhaging in order to exist.
This is an important nuance during a rate hike cycle. Central banks have recently guaranteed us a war against inflation. This includes rate hikes and balance sheet runoffs. Usually this translates in less available cash, and higher borrowing costs. Therefore, it is important for companies to depend less on that for growth; otherwise, their execution plans could hit major headwinds. Statistically, SE stock is not exorbitantly expensive. It has a 7.4x price-to-sales ratio, which is comparable to that of Apple (NASDAQ:AAPL). For a hyper growth company, some might consider it cheap.
Sea Limited’s Business Is Impressive
Demand for Sea Limited’s business should remain strong, because it serves several popular verticals: e-commerce, digital entertainment and fintech. The company is essentially a blend of Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and Block (NYSE:SQ).
As successful as it has been so far been, investors have no reason to doubt that it will continue to be successful. There are no signs yet of slowdowns, so the upside opportunity remains intact. If the indices are higher in the future, then SE stock owners should have the opportunity to prosper. Technically it has already rallied so far, but it has so much more to go. I shared a weekly chart today that best shows the available runway.
The target on this run is much higher than most people realize. But it may take time to get there, and there are many hurdles along the way. Despite it having support at $110, SE stock will struggle against the milestones it fails to hold coming down. There are sellers lurking near $160, and this will repeat $20 and $40 higher.
The ascent for the bulls will become more laborious, but they at least will have momentum on their side. So far, the sellers have been in charge, and they have successfully sold every rally. Therefore the buyers should recognize that they are underdogs. Until they can prove that they have taken the momentum away from the bears, investors should only take partial positions. Leaving room to add later is an effective way of managing risk responsibly. We have way too many outside risk factors to be too confident with our assumptions.
On the date of publication, Nicolas Chahine 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.