Singapore-based Sea Limited (SE) runs an integrated platform consisting of digital entertainment, e-commerce, and digital financial services, each localized to meet the individual features of various markets.
Many of Sea’s markets are undergoing a generational metamorphosis into the new digital economy. Digital inclusion is converging consumers ever more closely to each other, aiding the company to grow at fantastic rates.
I am bullish on the stock.
Robust Growth Is Sustained
Back in November, Sea released its Q3 2021 earnings results, with numbers indicating that its impressive growth is being sustained. Quarterly revenues increased 121.8% year-over-year to $2.7 billion.
To emphasize Sea’s growth, it’s better to follow the company’s sequential growth instead. Sea impressed investors in Q3, with revenues revving 18.4% quarter-over-quarter. Note that four consecutive quarters of at least 20% sequential growth will lead to triple-digit annual growth.
Hence, even if Sea’s growth were to decelerate a bit (as one could argue based on its 18.4% sequential revenue growth in Q3), it’s rather likely that near triple-digit growth will be sustained for the next few years at Sea’s ongoing expansion trajectory.
As Sea keeps expanding its operations, profitably is nearing by the quarter. Net margins stood at -21.3% at the end of the quarter, compared to -34.6% in Q3 2020, illustrating this positive margin expansion.
At the end of Q3, Sea had $11.1 billion sitting in the bank, which should suggest the company has a war chest of firepower to support any short-term losses as it expands. Sea posted net losses of $570.9 million in Q3, a burn rate which it can afford to be suffering for quite some time.
Note that the company’s fat cash position is due to Sea announcing a combined offering of American Depositary Shares equity and convertible notes back in September.
Sea managed to raise around $6.3 billion in new funds. Why is this impressive? Because it is the largest capital raise in history by a Southeast Asian company. In my view, this should not only reassure investors regarding Sea’s liquidity, but it also highlights investors’ trust towards the company, as well as its long-term prospects.
Sea will likely deploy the proceeds from the offering to fund growth for Shopee, Sea’s e-commerce segment, potentially to tap into new markets. Shopee has already demonstrated its capability to grow its market share in emerging markets through its vibrant and well-targeted marketing campaigns; hence I assume that Sea sees solid ROCE in this area.
Wall Street’s Take
Turning to Wall Street, Sea Limited has a Strong Buy consensus rating, based on nine Buys and one Hold assigned in the past three months. At $367.80, the average Sea Limited price target implies 154.9% upside potential.
Conclusion
Sea is anticipated to deliver revenues of $9.46 billion in FY 2021. At the stock’s current price levels, this suggests a forward price-to-sales multiple of around 8.5, which, in my view, is a very attractive multiple considering the company’s growth and margin prospects.
With revenue growth likely to be sustained near the triple digits, I find Sea one of the most undervalued growth stocks out there, in fact.
In any case, I anticipate Sea’s management to thoughtfully deploy the recently raised capital based on their considerate execution so far.
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