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Sea: Positioned to Grow, Reasonably Valued
Stock Analysis & Ideas

Sea: Positioned to Grow, Reasonably Valued

Singapore-based Sea Limited (SE) is known for its integrated platform consisting of digital entertainment, e-commerce, and digital financial services, each localized to meet the unique characteristics of different markets.

Many of Sea’s markets experience a generational transition to the new digital economy. Digital inclusion is bringing consumers ever more closely to each other, benefiting the company.

I am bullish on SE stock. (See Analysts’ Top Stocks on TipRanks).

Strong Liquidity to Sustain Growth

Back in August, Sea released its Q2-2021 earnings results, with numbers revealing explosive growth. Quarterly revenues increased 158.6% year-over-year to $2.3 billion.

To highlight Sea’s growth, it’s better to track the company’s sequential growth instead. Sea impressed investors and analysts alike in Q2, with revenues accelerating 29.3% quarter-over-quarter. Note that four sequential quarters of at least 20% quarter-over-quarter growth will result in triple-digit annual growth.

Therefore, even if Sea’s growth were to slow down a bit, it’s quite likely that triple-digit growth could be sustained for the next couple of years at the company’s current expansion trajectory.

As Sea continues to expand its operations, profitably is coming closer by the quarter. Net margins stood at -19% at the end of Q2, which is the closest the company has gotten so far in reaching a positive bottom line.

At the end of Q2, Sea had $5.61 billion sitting in the bank, which should translate to plenty of firepower to sustain any short-term losses. Sea reported net losses of $433.7 million in Q2, a burn rate which the company can afford to be suffering for a while.

Further, in September, Sea Limited announced a combined offering of American Depositary Shares equity and convertible notes. While the offering startled the market, causing shares to decline temporarily amid dilution fears, the company managed to raise around $6.3 billion in new funds.

This constitutes the biggest capital raise in history by a Southeast Asian company. Hence, as far as liquidity goes, I doubt Sea investors should have any worries at this point.

It’s quite likely that Sea will utilize the proceeds from the offering to finance growth for Shopee, Sea’s e-commerce division, potentially tapping into new markets.

While competition is tough in the emerging markets, with an example being MercadoLibre (MELI) in Latin America, Shopee has showcased its ability to obtain market share in such countries through its dynamic and well-targeted marketing campaigns.

In any case, I expect Sea’s management to thoughtfully utilize the recently raised capital based on their thoughtful execution so far.

The Valuation

Since Sea remains unprofitable, it’s more meaningful to value the company based on its sales. Sea is expected to deliver revenues of $9.08 billion in FY2021. At the stock’s current price levels, this implies a forward price-to-sales multiple of around 22, which, while rich, is likely justified at Sea’s ongoing growth levels.

With revenue growth potentially able to maintain near triple-digit revenue growth, one could even argue that shares are on the undervalued side. That is, considering that Sea’s gross margins currently stand at around 40% and are likely to expand amid favorable economies of scale over the long run. For this reason, I am bullish on the stock.

Wall Street’s Take

Turning to Wall Street, Sea Limited has a Strong Buy consensus rating, based on 13 Buys assigned in the past three months. At $376.56, the average Sea Limited price target implies 6% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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