Sea Limited (NYSE: SE), the Singapore-based tech company that owns the e-commerce platform Shopee and game publisher Garena, recently released its first quarter results. Its revenue jumped 147% year-over-year to $ 1.8 billion, beating estimates by $ 20 million. Its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) improved from a loss of $ 70 million to a profit of $ 88 million, but missed expectations by $ 85 million.
Based on generally accepted accounting principles (GAAP), Sea’s net loss fell from $ 281 million to $ 422 million, or $ 0.62 per share, or seven cents below expectations. Sea’s stock edged up after this mixed report, but the ongoing tech sell-off has further reduced its value by nearly 20% over the past three months.
Sea seems out of favor in this market, which favors value over growth stocks amid concerns about rising bond yields, inflation and unfavorable year-over-year comparisons for pandemic, high stocks. growth. Nonetheless, I still bought additional Sea shares after his last report for four simple reasons.
1. Shopee’s growth accelerates
Sea’s e-commerce revenue grew 160% to $ 2.2 billion in 2020. But in the first quarter of 2021, its e-commerce revenue grew another 250% year-on-year to $ 922 million. .
In the quarter, Shopee’s gross orders rose 153% to $ 1.1 billion, while its gross merchandise volume (GMV) rose 103% to $ 12.6 billion. These numbers put him comfortably in front Ali Babaof (NYSE: BABA) Lazada as the largest e-commerce company in Southeast Asia and Taiwan.
During the conference call, Sea CEO Forrest Li attributed Shopee’s accelerated growth to its “strengthening of market leadership”, buyers spending more time on its Android app, growth at the abroad in Brazil and to more support services for its small and medium-sized traders.
2. Reduction of losses for every Shopee order
The e-commerce segment’s Adjusted EBITDA loss fell from $ 264 million to $ 413 million, but most of that loss was caused by its market expansion rather than loss strategies (such as coupons and shipping subsidies) that he has used in the past to attract new buyers.
In fact, Shopee lost just $ 0.38 in Adjusted EBITDA per order in the quarter, compared to an average loss of $ 0.41 in the fourth quarter and a loss of $ 0.61 a year ago. Shopee won’t be able to equalize his orders anytime soon, but these falling losses suggest he has a path to profitability after cooling his investments and slashing his stock-based compensation.
3. Garena is still “on fire”
Sea’s digital entertainment unit Garena derives most of its revenue Free fire, a self-released battle royale game he released in late 2017.
Free fire Popularity, particularly in Southeast Asia and Latin America, has pushed Sea’s digital entertainment revenue 78% to $ 2.0 billion in 2020. Its total bookings jumped 80% to 3. $ 2 billion.
In the first quarter, its digital entertainment revenue jumped 111% year-over-year to $ 781 million, with bookings increasing 117% to $ 1.1 billion. Its quarterly paid user count also rose 124% to 79.8 million, or 12.3% of its quarterly active users, from just 8.9% a year earlier.
Digital entertainment segment adjusted EBITDA increased 140% to $ 717 million. These profits offset Sea’s Adjusted EBITDA losses in its other three businesses (e-commerce, digital entertainment and financial services) and kept its total Adjusted EBITDA in the dark.
Bears believe Free fire will fade away and cause Sea’s Adjusted EBITDA to bleed red ink again. But its growing percentage of paid users indicates it’s still gaining momentum, and Garena is already testing an improved successor, Free Fire MAX, to extend the game’s lifecycle as it develops new titles.
4. The stock is reasonably valued
Sea has given no indication, but analysts expect its revenue to grow 89% this year and 40% next year. They also expect its non-GAAP losses to decline slightly, but that won’t pay off anytime soon.
Based on these estimates, Sea’s stock is trading at 14 times this year’s sales and ten times next year’s sales. These price-to-sell ratios don’t come cheap, but they are reasonable in a market filled with tech stocks trading at much higher valuations while generating slower growth.
In addition, these estimates could still be too conservative as a new wave of COVID-19 infections recently erupted in Southeast Asia and Taiwan. If these countries implement further foreclosure measures, Sea’s online shopping and mobile gaming revenue could rise again and easily exceed average analyst expectations, which would likely lead to slower growth in a post-world world. pandemic.
But Sea is no action for conservative investors
Sea’s e-commerce and gaming businesses have enormous growth potential, but the overall business still relies on a single successful game to remain profitable on an Adjusted EBITDA basis. It will also likely continue to prioritize investments over GAAP earnings for the foreseeable future, and its stock could fall out of favor as investors turn to more cautious investments.
Therefore, Sea is not a stock for uncomfortable investors. But if you’re looking for a potential multibagger that gives you great exposure to the booming Southeast Asian tech sector, you should consider recovering stocks and ignoring short-term volatility.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning 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.