Headquartered in Singapore, consumer internet company Sea Limited (SE) is well known for Free Fire, a popular mobile battle royale game developed by its digital entertainment platform, Garena. Even though its digital financial services platform SeaMoney is still in its early stages of development, its e-commerce platform Shopee has expanded in several markets. Its shares soared to hit their $359.84 all-time high on September 7, 2021, following the announcement of Shopee’s possible launch in Poland. The stock has gained 18.1% over the past month to close yesterday’s trading session at $342.91. However, it is currently trading 4.7% below its all-time high.

On September 10, SE announced that it had raised approximately $6 billion in an equity and convertible bond sale, the proceeds from which it expects to use for strategic investments and potential acquisitions. However, move was not well received by all. Lightstream Research analyst Oshadhi Kumarasiri said, “The reason for this fundraising could be an early indication that the gaming business is no longer capable of funding the e-commerce and fintech growth.” 

In addition, the company continues to face intense competition from e-commerce giants such as Amazon.com, Inc. (AMZN) and other regional players, including MercadoLibre, Inc. (MELI) and Coupang, Inc. (CPNG). Furthermore, SE has witnessed a decline in hedge fund sentiment lately. So, the stock’s near-term prospects look bleak.

Here’s what could influence SE’s performance in the near term:

Aggressive Market Expansion May Keep Bottom-Line Under Pressure

While Shopee’s potential  expansion in Poland represents its first expansion into the European e-commerce market, it expanded into Mexico in February 2021. Furthermore, in June 2021, it was reported that Shopee would launch in Colombia and Chile. In addition, Shopee launched a recruitment campaign for vendors in August 2021 to sell on ‘Shopee India’.

In addition to Shopee’s dominant position in Brazil, it’s speculated that its investment arm, Sea Capital, is also considering putting money into startups in Latin America and beyond. However, these potential expansion activities are expected to take a toll on the company’s already weak bottom line in the near term.

Weak Profitability

SE’s total revenue increased 158.6% year-over-year to $2.28 billion for the second quarter, ended June 30, 2021. However, its cost of revenue increased 98.1% year-over-year to $1.35 billion. Its net loss came in at $433.67 million, up 10.2% year-over-year. Its loss per share was  $0.61 compared to $0.68 in the year-ago period. Also, its total adjusted EBITDA came in at a $24.11 million loss, compared to a  $7.74 million gain in the prior-year quarter.

In terms of trailing-12-month gross profit margin, SE’s 36.90% is 27.2% lower than the 50.69% industry average. Likewise, its trailing-12-month EBITDA margin is negative versus the 20.98% industry average. Moreover, its trailing-12-month ROCE, ROTA, and ROTC are negative, versus the 8.48%, 2.67%, and 4.31% respective industry averages.

Stretched Valuation

In terms of forward EV/S, SE’s 20.03x is 688.6% higher than the 2.54x industry average. Likewise, the stock’s 432.05x forward EV/EBITDA is significantly higher than the 9.89x industry average. Its  forward P/S and P/CF of 20.71x and 644.66x, respectively, are higher than the 1.72x and 9.99x industry averages.

POWR Ratings Reflect Bleak Prospects

SE has an overall D rating, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. SE has a D grade for Quality, which is in sync with its lower-than-industry profitability ratios.

The stock has a D grade for Stability, consistent with its 1.31 beta. SE has a D grade for Sentiment also, in sync with unfavorable analyst sentiment.

Moreover, SE has an F grade for Value, consistent with its higher-than-industry valuation ratios.

SE is ranked #64 of 75 stocks in the Internet industry. Beyond what we’ve stated above, we have also given SE grades for Momentum and Growth. Get all the SE ratings here.

Bottom Line

As COVID-19 cases continue to rise in Singapore, SE is expected to capitalize on the continuation of the remote lifestyle. Its revenue is expected to increase 93% year-over-year to $2.34 billion in the current quarter (ending September 30, 2021). However, analysts expect its EPS to remain negative in the current quarter, this year, and next year. So, the stock looks highly overvalued, and we think is best avoided now.

How Does Sea Limited (SE) Stack Up Against its Peers?

While SE has an overall POWR Rating of D, one  might want to consider investing in Internet stocks with an A (Strong Buy) rating, such as Travelzoo (TZOO) and Yelp Inc.

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