Headquartered in Singapore, Sea Limited (SE) is engaged in digital entertainment, e-commerce, and digital financial service businesses in Asia, Latin America, and internationally. It operates through its Garena gaming platform, Shopee e-commerce platform, and SeaMoney, a digital financial services platform. SE’s shares have advanced  29% year-to-date, primarily because of a substantial surge in e-commerce revenue and its expanding global footprint.

However, its sky-high valuation and low profit might be a cause of worry for investors. Furthermore, concerns about SE’s staggering losses in the face of a potential slowdown of its gaming division with the reopening of economies could bring downward pressure on the stock.

Although the company is witnessing solid revenue growth, its business model is unstable and its losses are steep. Here is what we think could influence SE’s performance in the near term:

Slowdown in Gaming Business

While SE’s e-commerce segment generates most of the company’s revenue, its gaming division’s growth  has been showing signs of slowing down. In 2020, it generated significant revenue and profit from Garena, its digital entertainment division, fueled by the hot demand for gaming. The COVID-19 pandemic drove hordes  of new gamers to its gaming platform. But with an economic recovery gathering steam, its platform’s active user growth may cooldown in the coming months. The company expects its digital entertainment bookings to increase 38.1% in 2021, representing  a substantial slowdown from its 80% bookings growth in 2020.

With more people now embracing outdoor activities again as a result of  large-scale vaccination drives, the demand for gaming could slowdown. As such, continuing to engage its paid users and increase its active users could be challenging for SE in the near term.

Disappointing Financials and Low Profitability

SE’s total operating expenses increased 80% year-over-year to $891.04 million in the fourth quarter, ended December 31, 2020. The  company’s operating loss increased 55.3% from its  year-ago value to $357.32 million. Its net loss rose 86.1% year-over-year to $524.57 million over this period. SE reported an adjusted EBITDA of negative $171.26 million for its digital financial services. Also, its loss per share was $0.87, compared to a $0.53 loss per share  in the fourth quarter of 2019.

The company’s 30.8% trailing-12-month gross profit margin  is 39.6% lower than the 51% industry average. Its  3% levered free cash flow margin is 73.6% lower than the 11.2% industry average. Also,  its ROE and ROA came in at negative 71.2% and 15.5%, respectively.

Stretched Valuation

In terms of trailing-12-month EV/Sales, SE is currently trading at 30.77x, which is 930.1% higher than the 2.99x industry average. In fact, its forward 170.42 EV/EBITDA multiple is 1,508.5% higher than the 10.60 industry average.  Also, the stock’s 17.57 forward Price/Sales ratio is 841.7% higher than the 1.87 industry average. And SE’s forward 63.98 Price/Cash flow ratio  is significantly higher than the 2.96 industry average .

Consensus Price Target Indicate Potential Downside

Currently trading at $256.83, Wall Street analysts expect the stock to hit $195.72 in the near term, indicating a 23.8% potential downside. Their  price target ranges from a low of $101 to a high of $230.

Unfavorable POWR Ratings

SE has an overall F rating, which translates to Strong 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 Value and Quality. This justifies the stock’s premium valuation and low profitability.

Also, it has a D grade for Growth, which is consistent with the company’s s poor growth.

In addition to the grades we’ve highlighted, one can check out additional SE ratings for Sentiment, Stability, and Momentum here.

SE is ranked #70 of 71 stocks in the F-rated Internet industry.

There are several top-rated stocks in the same industry. Click here to view them.

Bottom Line

SE’s stock has gained 362.6% over the past year. While the company might maintain its e-commerce growth, a potential decline in its gaming business is a major concern. In addition, , considering its lofty valuation and increasing operational losses, we think the stock could be due for a retreat  soon.

SE shares were trading at $254.50 per share on Friday morning, down $2.33 (-0.91%). Year-to-date, SE has gained 27.86%, versus a 12.04% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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