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Dec 21, 2023 11:10 AM EST
In addition to having a sizable digital entertainment (gaming) sector and a developing digital financial services platform, Sea Limited's primary business is e-commerce, much like Amazon's.
With a current market capitalization of about $21.8 billion, Sea Limited would be worth a small portion of Amazon's $1.5 trillion market capitalization, even if its stock price were to climb tenfold.
Here's why stock investors might want to buy the stock in bulk right now.
An individual typically uses the internet for six hours and forty-one minutes per day. They spend about thirty percent of their waking hours in front of a screen, assuming they get eight hours of sleep. Companies such as Sea Limited are naturally interested in meeting people where they want to spend their time, which is why they are substantially investing in digital services.
The Shopee hybrid consumer-to-consumer and business-to-consumer e-commerce platform is the main source of income for Sea Limited.
With its headquarters in Singapore, Shopee is well-known throughout Asia, including Indonesia, Malaysia, Vietnam, and Taiwan. It is the most popular online marketplace in Southeast Asia, with over 342 million visits per month as of 2023, according to Statista.
Digital entertainment, mostly from its Garena game production studio, is Sea Limited's second-largest revenue stream. It is the creator of popular mobile games including Call of Duty: Mobile and Free Fire, which have been downloaded over a billion times each.
Garena's quarterly user count is 544 million, a decrease from its peak of 729 million in 2021 during the pandemic. In 2022, Free Fire lost around 40 million monthly users when it was banned in India on privacy concerns; however, it is currently being resurrected.
Due to fewer players purchasing Garena's games, Sea Limited's total income has suffered as a result of the user decline.
Lastly, the engine of Sea Limited's digital financial services division is Sea Money. In addition to providing funding, it acts as a platform for payments and banking for users. In addition to offering purchase now, pay later options and cash loans, it also supports Shopee merchants to support their expansion. At 13% of Sea Limited's current total revenue, the digital financial services area is still relatively tiny.
The management of Sea Limited was very focused on increasing sales and acquiring new customers when the company's shares went public in 2017. That approach was maintained until 2022, when rising interest rates and inflation took a toll on the overall state of the economy. Since then, consumers all around the world have been cutting down on spending, thus Sea Limited has to reevaluate its top objectives.
The corporation is now concentrating on making money while spending a comparatively little amount of money, which has come at the price of sales growth. As 2023 draws to an end, Wall Street actually projects Sea Limited's sales to reach $12.9 billion for the entire year, which would be a mere 4% increase over 2022.
Sea Limited's revenue increased at a compound annual growth rate of 86% from 2017 to 2022, which makes the anticipated 2023 performance extremely slow. The biggest obstacle has been gaming, as the digital entertainment segment's income fell 43% in the first nine months of 2023. Conversely, e-commerce continued to increase at a rate of 33%.
However, there's more to the recent deterioration in Sea Limited's overall performance. In the first nine months of this year, the firm reduced its operational costs by 24%, with its highest cost, sales and marketing expenses, falling by 35%.
With Sea Limited cutting back on expenditures so drastically, it is challenging to draw in new clients and develop revenue-generating prospects.
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Two years ago, you would have found Sea Limited stock trading at a P/S ratio of 20, a notably high valuation. It's doubtful that it will reach that level again, especially considering that even Amazon stock currently trades at a P/S ratio of 2.8. This makes Sea Limited seem remarkably undervalued in comparison.
While it's improbable for Sea Limited's revenue to replicate its previous compound annual increase of 86%, the company may experience a boost in the future with improved economic conditions. This potential improvement could allow Sea Limited to increase spending on various aspects like marketing, driving further growth. Even if the revenue growth were to average a more modest 20%, it could still surpass $79.8 billion annually within the next decade.
Investors will value Sea Limited at $223 billion, or ten times its current trading price, if they assign the business a P/S ratio of 2.8 (to match Amazon).
Therefore, purchasing Sea Limited shares at the present $35 price might provide you another shot at a tenfold return if you missed the enormous run-up in Amazon stock since 2013.
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