The past five years have been a roller coaster for Southeast Asian super-app Sea Limited (SE -0.38%). After its e-commerce, digital financial services, and video game businesses all boomed during the pandemic, the post-pandemic hangover and rise in interest rates caused the stock to plunge some 90% from its highs.
While some investors might have cast off this name, shares are now up roughly 160% this year but still about 70% below their all-time highs. With Sea’s businesses finally back on a profitable growth track, is the stock still a buy?
Profits or growth — why not both?
During the pandemic, Sea was a hypergrowth but money-losing company looking to ambitiously expand its business empire. However, when the “reopening” trade led to a decline in its cash-cow video gaming business and interest rates increased, Sea had to pivot. Sea abandoned certain markets in Europe and India and slashed sales and marketing expenses to the bone. While growth slowed, the company became profitable impressively quickly.
However, when things stabilized, it saw incoming competition from TikTok in Sea’s all-important Shopee e-commerce business. TikTok decided to sell goods from its streaming platform in Sea’s Indonesian market. To react, Sea had to invest in e-commerce live streaming, which helped growth reaccelerate but also caused its bottom line to dip back into losses. The stock plunged again.
But since last quarter, everything now seems to be back on track, with Sea growing not only its revenue but also its bottom line across all three businesses. Investors are rewarding that accordingly.
Firing on all cylinders
The last quarter was just about as clean a quarter as one can find in Sea’s recent history or any e-commerce stock, for that matter.
|
Metric |
E-commerce |
Digital Financial Services |
Gaming |
|---|---|---|---|
|
Revenue/bookings |
$3,184 million |
$616 million |
$498 million |
|
Revenue/bookings growth (YOY) |
42.6% |
38% |
24.2% |
|
Adjusted EBITDA |
$34.4 million |
$187.9 million |
$314.4 million |
|
Adjusted EBITDA growth (YOY) |
110% (Q3 2023 was a $346 million loss) |
13.4% |
34.4% |
Data source: Sea Limited Q3 2024 earnings release and presentation. YOY = year over year. Gaming top line is bookings, not generally accepted accounting principles (GAAP) revenue. E-commerce and Digital Financial Services top lines are GAAP revenue.
As you can see, the all-important cash-generating gaming division, helmed by free-to-play hit Free Fire, has returned to bookings growth after a couple of years of declines. Bookings include all revenue plus the change in deferred revenue or up-front payment for bonus features that may be recognized in future quarters. The figure usually gives a better indication of the direction of the business than revenue, which is recognized over time.
Bookings have now increased sequentially for the past four quarters. That’s a promising sign because the gaming division currently brings in most of Sea’s profits, which management can then reinvest.
On the earnings call, management expressed optimism for Free Fire as a core “evergreen” franchise that will last a long time. This is because management can leverage local nuances and social media trends and incorporate them into the game itself, constantly refreshing Free Fire and keeping customers coming back. Management expects Free Fire’s full-year bookings to grow more than 30% in 2024.
Meanwhile, the Shopee e-commerce and Sea Money segments are also progressing well. Management noted a more stable competitive environment this year leading to higher take rates and better profitability for Shopee. The company’s investments in shipping and logistics, lower prices, and adtech have enabled Sea to charge higher transaction fees and get higher advertising rates from sellers.
This was also the first quarter in which the high-growth Brazilian market became profitable on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, joining the rest of the Southeast Asian markets in becoming profitable.
Meanwhile, the digital financial services wing saw huge revenue growth, with small business and consumer loans outstanding up 73% on the year. Management has been expanding the lending business from Shopee buyers and sellers to more off-platform customers.
While adjusted EBITDA was only up mid-teens, that could be due to management conservatively reserving for these new customers’ loans. Yet, nonperforming loans 90 days or greater past due improved relative to the last quarter, at just 1.2% of loans outstanding.
But is it a buy?
After this year’s outperformance and a post-earnings pop, Sea now trades at 3.5 times this year’s revenue estimates and about 51 times this year’s earnings estimates. While not especially cheap on the surface, Sea’s inflecting earnings per share are forecast to nearly double in 2025, with shares at just 27 times next year’s estimates.
That’s not overly expensive nor overly cheap; however, if the Southeast Asian economy continues to grow and management is able to enter new markets and introduce new services, as has been its history, Sea could still be a buy now. The company has been through a trial by fire over the past few years and has come out stronger on the other side. That bodes well for its profit-growth prospects going forward.
