By Anthony Di Pizio, The Motley Fool,Trades Of The Day, 2024-08-30
Sea Limited (SE) operates in the e-commerce, digital entertainment, and digital financial services industries, so its business boomed when people were under lockdown restrictions at the height of the pandemic. As a result, its stock soared to an all-time high of $357 near the end of 2021.
But social conditions returned to normal a short time later, and the economic climate also shifted in 2022 when global central banks started raising interest rates. Sea Limited made a necessary pivot to a more sustainable business strategy by focusing less on outright growth, and more on profitability.
Investors tend to favor fast growth when it comes to technology companies, so Sea Limited stock has declined by 76% from its record high. But it's mounting a firm recovery this year, and I think it could be the start of a new long-term bullish trend. Here's why Sea Limited stock might be a great buy in September.
A triple threat in the digital economy
Sea Limited is based in Singapore, and it primarily serves Southeast Asia markets, where the company says consumption is a key driver of economic performance. That's important because Sea is primarily focused on serving customers in all three of its business segments.
During the second quarter of 2024 (ended June 30), Sea's Shopee e-commerce platform processed a whopping 2.5 billion orders, which was a 40% increase from the year-ago period. The company is taking a page out of Amazon's book by improving the efficiency of its logistics network, which can reduce costs and increase order frequency.
During Q2, Sea said more than 70% of orders across Asia were delivered within three days, with its cost per order declining by 8% compared to a year ago. Amazon has found that customers order more often when they receive products fast, so this bodes well for Shopee over the long term.
SeaMoney is Sea's digital financial services platform, which has important synergies with Shopee. It lends money to sellers to help them expand, and it also offers buy now, pay later loans to consumers which drive sales across the e-commerce platform. During Q2, SeaMoney registered more than 4 million first-time borrowers, which was double the number it added in the same period last year. Overall, the platform had $3.5 billion worth of active loans at the end of June, which was up 40% year over year.
Finally, Sea's digital entertainment business is headlined by its Garena game development studio, which is home to the global smash-hit mobile game Free Fire. The segment had 648 million quarterly active users in Q2, marking the second consecutive quarter of growth after a post-pandemic slump. Unfortunately, average revenue per paying user fell to $10.20, which was the lowest level in a year.
Simply put, although people flocked to titles like Free Fire — which was the most downloaded game globally in Q2 — they appeared less willing to open their wallets compared to previous quarters.
Sea's revenue growth continues to accelerate
Sea Limited generated $3.8 billion in total revenue during Q2, which was a 23% increase from the year-ago period. It was the fastest growth rate in two years, and it marked the second consecutive quarter of acceleration.
The bulk of that revenue came from the e-commerce segment, which generated $2.8 billion, representing 33.7% growth from the year-ago period. SeaMoney brought in $519.3 million in revenue, which was up 21.4%, while digital entertainment was the laggard with revenue shrinking 17.7% to just $435.6 million.
Sea increased its operating expenses by 28.7% year over year to $1.5 billion during Q2, which included a 57% jump in marketing spending. That was probably the main reason for the company's accelerated revenue growth rate, and it's a sign management might be pivoting back to a growth-oriented posture with a lesser focus on profitability.
Nevertheless, Sea still delivered positive net income of $79.9 million in Q2, although that was down sharply from the $330.9 million in net income it generated in the year-ago period.
Investors should monitor how Sea balances revenue growth and profitability in the coming quarters. Theoretically, growing more quickly by investing heavily in customer acquisition can pay dividends in the future, but the stock market might sour on Sea if it reverts back to losing billions of dollars per year in the current economic climate.
With that said, the company is in a great financial position with more than $6 billion in cash, equivalents, and short-term investments on its balance sheet. So it can afford to sustain some losses if that's the path management chooses to take.
Sea Limited stock is cheap
Sea Limited stock is up 116% in 2024 so far, but as I mentioned, it's still down 76% from its all-time high.
Despite the strong gain this year, it's incredibly cheap right now according to one widely used valuation metric. Based on the company's $14.4 billion in trailing 12-month revenue and its market capitalization of $47.6 billion, it trades at a price-to-sales (P/S) ratio of just 3.3.
The stock would have to nearly triple just to bring its P/S ratio in line with its long-term average of 9.7, going back to when the company came public in 2017.
Since Sea's business relies heavily on consumer spending, the company could benefit significantly if the U.S. Federal Reserve cuts interest rates in September as expected. Other central banks around the world are likely to follow — Indonesia, for example, is one of Sea's largest markets, and its central bank is preparing for a cut before 2024 is over.
With a strong cash position, accelerating revenue growth, and an attractive valuation, investors could do very well buying Sea Limited stock in September and holding it for the long term.
— Anthony Di Pizio
Source: The Motley Fool
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