Sea Limited: A Growing Player In A Big Addressable Market

The digital economy in Southeast Asia is accelerating as the COVID-19 pandemic has moved more people online than ever before.

According to a report by Google (GOOGL), the total number of internet users in Southeast Asia has swelled from 260 million in FY2015 to 400 million in FY2020. Approximately 70% of the region’s population now uses the internet, which pushed the cyber economy to over $100 billion for the first time in FY2020. Google projects the market to increase to $300 billion by FY2025, which provides some insight on the sector’s impending growth.

For an investor, Amazon (AMZN), who is globally diversified, provides exposure to the digital economy in U.S. Alibaba (BABA) and (JD) cover the Chinese e-commerce economy, while Sea Limited (SE) offers investors exposure to the growing internet market of Southeast Asia.

Strong Growth Across Business Segments

Sea Limited operates under three business segments, which include digital entertainment, e-commerce and digital financial services. The company’s individual segments have delivered robust numbers in-line with the growth in the internet economy.

In the digital entertainment segment, Sea reported an 80.3% growth in bookings to $3.2 billion on a year-on-year basis. EBITDA for the same period was 94% higher at $2 billion, and with steady growth in paying users, the segment has a positive outlook.

It’s worth noting that the company’s Free Fire mobile game is among the most downloaded games globally. A focus on e-sports is also likely to deliver results and the company expects a healthy 38.1% growth in gross bookings.

The e-commerce segment’s top-line growth has been stellar. For FY2020, GAAP revenue was $2.2 billion, which was 159.8% higher on a year-on-year basis. However, the adjusted EBITDA loss for the year widened to $1.3 billion.

If growth sustains, the company should achieve operating level profitability in the next few years. The e-commerce model has shown to be a cash flow machine as proven by the likes of Amazon and Alibaba, among others.

For the current year, the company is expecting e-commerce revenue to increase to $4.6 billion (mid-point of guidance), and with over 100% year-on-year growth, the segment is a potential long-term value creator.

Sea’s e-commerce platform, Shopee, is the largest in Indonesia. The country is likely to remain the biggest e-commerce market in Southeast Asia and while Shopee faces competition from Alibaba-backed Lazada, the market is big enough to absorb multiple players.

The company’s digital financial services segment already has 10 million monthly paying users of the mobile wallet. For FY2020, the segment reported $7.8 billion in total payment volume, however, the adjusted EBITDA loss also widened to $511 million.

Across all segments, Sea still managed to report positive adjusted EBITDA of $107 million for FY2020. A key stock upside trigger would be the narrowing of EBITDA losses in the e-commerce and digital financial services segment.

Considering the company’s financial flexibility, cash burn in the near-term is not a concern. As of December 2020, Sea reported cash and equivalents of $6.2 billion which will help the company push for aggressive growth. Sustained growth in the digital entertainment segment would depend on new game launches.

Wall Street Analysts Weigh In

Consensus among Wall Street analysts is a Strong Buy based on 10 Buy a 1 Hold recommendations. The average analyst price target of $285.29 implies that SE stock has a further 35% upside potential from current levels over the next 12 months. Price targets range from a low of $240 to a high of $330 per share. (See Sea Limited stock analysis on TipRanks)

Concluding Views

From a top-line perspective, Sea Limited is likely to continue to report strong growth. However, investors should pay attention to EBITDA level profit growth, particularly across the e-commerce and digital financial services segments.  

The company’s free cash flows (FCF) still remain negative despite improving operating cash flows, however, once FCF turns positive and accelerates, SE stock could be well positioned for a further rally.

Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.