Sea Limited is down 40% from its peak. Is this a purchase?

Shares of the tech giant Limited sea (NYSE: SE) have experienced a roller coaster ride in 2021. After peaking at $ 372.70 on Oct. 19, the stock fell almost 41% to close at $ 219.60 on Dec. 27.

Much of that drop can be attributed to the general selloff in tech stocks, triggered by growing concerns about the global economic recovery amid a wave of COVID-19 infections, as well as rate hikes in expected interest by the US Federal Reserve for the coming year. The slowdown in the pace of bond purchases by the Fed to curb rising inflation was also a liquidation factor. The company is still not profitable, which takes on greater importance in the minds of investors in times of economic uncertainty.

Despite these challenges, there are many factors that can make Sea a winning stock in 2022. Let’s look at a few important ones.

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Focus is on the fast growing Southeast Asia market

Sea operates primarily in three high growth sectors: digital entertainment (Garena), e-commerce market (Shopee) and digital financial services (Sea Money). All of these markets are experiencing strong adoption trends across the globe, particularly in Sea’s targeted market in South East Asia.

According to the Sea Economy Report 2020, the internet economy in Southeast Asia is expected to triple from $ 100 billion (3.7% of the region’s GDP) in 2019 to $ 300 billion (8.5% of the region’s GDP). GDP of the region) in 2025. With Internet penetration in Southeast Asia at 69% in 2021, significantly lower than 90.8% in the United States, there is plenty of room for Sea to grow. is developing in this market.

Garena continues to generate healthy profits

Sea’s only profitable business, Garena, continues to ride the success of its mobile game Battle Royale, Free fire. Ranked by App Annie as one of the best mobile games on AlphabetGoogle Play worldwide based on the average number of monthly active users, Free fire was also the top-grossing mobile game in Southeast Asia, India and Latin America in the third quarter (ending September 30, 2021).

The sea introduced Max Free Shooting to improve the quality, animation and graphics for its customers. These developments may help grow the game’s quarterly paid user base, which was only 12.8% of its total quarterly user base in the third quarter.

Sea’s third-quarter digital entertainment business revenue grew 93% year-on-year to $ 1.1 billion, while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) climbed by 22% year-on-year to $ 715 million. Yet some analysts question the company’s over-reliance on Free fire.

While Free fire undoubtedly represents a large part of Sea’s business, the company also distributes several Tencent‘s (OTC: TCEHY) popular games such as Call of duty onesd League of Captions. This distribution activity helps expand the company’s game user base.

Shopee is well positioned to take advantage of the growing penetration of e-commerce

Shopee currently accounts for almost 57% of the e-commerce market in Southeast Asia. Despite this, there are still plenty of opportunities here; the e-commerce penetration rate in this region is expected to increase from 27.4% in 2021 to 40.4% in 2025. Sea is also making its presence felt in the Latin American market, knowing that Shopee has already become the No. 2 of electronic commerce. app in the region based on monthly active users.

Shopee grew revenue at a rapid pace, with third-quarter revenue up 134% year-over-year to $ 1.5 billion. The sea follows in Amazon‘s (NASDAQ: AMZN) prioritizing market share growth over the profitability of its e-commerce activity, particularly in Latin America and Europe. To this end, the company has opted for aggressive marketing spending in the form of rebates and subsidies. However, Sea will most likely reduce its expenses once Shopee becomes even more established in these markets. The increase in orders coupled with the reduction in expenses will help pave the way for Shopee’s profitability.

Although it is currently more of a third-party market, Sea is also gradually shifting its e-commerce business model towards more profitable first-party sales. In the third quarter, direct sales (buying goods and services from wholesalers and then selling to customers) generated revenue and gross margin of $ 279 million and $ 30 million, respectively.

Sea Money will soon become a major growth engine

Although the smallest of Sea’s operating segments, Sea Money has posted excellent results in recent quarters. In the third quarter, the company’s mobile wallet services reported a 111% year-over-year jump in total payment volume to $ 4.6 billion. This helped push the segment’s revenue up 818% year-over-year to $ 132 million.

To increase adoption of its mobile wallet, Sea is partnering with several leading online and offline merchants in its target markets. The company has also launched other digital financial services such as digital banking, buy now pay later and insurtech, which will further boost Sea Money’s service penetration.

The recent withdrawal provided an opportunity for entry

In the third quarter earnings release, Sea forecasted e-commerce revenue of $ 5 billion to $ 5.2 billion for fiscal 2021, a significant improvement from the previous forecast of $ 4.7 billion to $ 4.9 billion. dollars. The company also kept its revenue forecast for fiscal 2021 for Garena at $ 4.5 billion to $ 4.7 billion. Analysts expect the company’s average revenue for fiscal 2021 to be around $ 9.51 billion, implying 117% year-over-year growth. Analysts also expect Sea’s average revenue for fiscal 2022 to increase by around 50% to $ 14.26 billion.

Based on this forecast, Sea is trading at 12.7 times FY2021 revenue and 8.5 times FY2022 revenue. The company’s price-to-sales ratio, although not very low , has fallen reasonably compared to its level at the beginning of October 2021.

Against the backdrop of robust secular favorable winds, an improving business model and reasonable valuation, Sea appears to be an attractive choice for 2022.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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