Singaporean e-commerce giant Sea Limited‘s (NYSE: SE) share price has plummeted nearly 59.7% from its 52-week high of $88.84. It was once touted as a high-octane stock, but investor sentiment for the company has soured due to a multitude of reasons, including a struggling gaming business, a high cash burn rate, a surprise loss in the third quarter of fiscal 2023 (ending Aug. 31, 2023), and the recent news of ByteDance’s TikTok reentering the Indonesian e-commerce market.
Despite these headwinds, the consensus analyst target price for Sea is $60, implying an upside potential of nearly 61% from its current price. While the target price seems a tad too optimistic, there are still many tailwinds that can drive the stock significantly up in the coming months.
Shopee in growth mode
Despite being a leading e-commerce player in multiple Southeast Asian markets, Sea’s Shopee business is not immune to the challenges posed by increasing competition from TikTok and Alibaba Group‘s Lazada. Responding to increasing competition, Sea is prioritizing scale, monetization opportunities, cost efficiencies, and market share gains over near-term profitability — similar to the strategy of e-commerce leaders Amazon and Alibaba.
Shopee generated $2.2 billion in revenue in the third quarter, up 16% year over year. However, e-commerce sales and marketing expenses surged by nearly 49.7% year over year to $861.5 million. While the elevated spending is painful in the short run, it is much needed to defend Shopee’s market share in the face of heightened competition.
Sea has been investing in live streaming to build an e-commerce content ecosystem efficiently. Increasing collaborations with content creators and live-streaming sellers, especially to promote products in high-margin categories such as beauty, health, and fashion are helping Shopee acquire new customers and increase engagement with existing ones. Marketplace sellers and content creators are increasingly participating in Shopee Live, as is evident from the rising number of average daily unique streamers, daily hours streamed, and daily streaming sessions in October 2023. Besides increasing user engagement, the company has also noted improvement in investment efficiency and unit economics, thanks to its live-streaming e-commerce strategy.
Sea has also ramped up expenses to improve its logistics network, including building a large network of multiple sorting centers and hubs across several localities, better routing for improved and more efficient delivery, and strengthening last-mile coverage in areas already serviced by Shopee. The success of these initiatives is evident in the 17% year-over-year decline in platform logistics cost per order for Shopee in Asian markets. Although this is also negatively affecting Sea’s value-added services business, the savings in logistics costs passed down to buyers and sellers will also help the company scale rapidly in its target markets.
SeaMoney is a robust business
Sea’s digital financial services business, SeaMoney, reported $446.2 million in revenue in the third quarter, up 36.5% on a year-over-year basis. The business also reported adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) of $165.7 million, a solid turnaround from a $67.7 million loss in the same quarter of the prior year. Gross loans receivable, a key metric predicting future growth prospects of this business, were up by 5.3% year over year to $2.4 billion.
Despite this, the company has managed to maintain the credit quality of its loans, as is evident from the non-performing loans past due by more than 90 days as a percentage of the gross loans receivable metric, which was 1.6%, a 40-basis-point improvement quarter over quarter. Sea is also confident of continuing the long-term growth of SeaMoney, without compromising on credit quality.
Improving trends in Garena
Although Sea’s gaming business, Garena, saw a significant year-over-year drop in bookings in the third quarter, there was a slight improvement on a sequential basis. This is worth noticing since the third quarter saw several schools reopening and fewer holidays across all of Garena’s key markets.
Furthermore, despite the delay in the relaunch of Free Fire in the huge Indian market, the game has managed to be the most downloaded mobile game globally in the third quarter. The launch of Free Fire in India will further propel Garena’s revenue in coming quarters. Additionally, Garena continues to be the key profit driver for Sea, considering that adjusted EBITDA was a solid 52.2% of total bookings in the third quarter.
Reasonable valuation
Sea is currently trading at a price-to-sales ratio of 1.5x, far lower than the company’s three-year average multiple of 7.9x.
Considering the many potential tailwinds and the bargain-basement valuation, Sea may prove to be an attractive pick in the long run. Hence, although the company is grappling with multiple challenges, it may make sense for retail investors to pick up a small stake in this stock now.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Manali Bhade has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Sea Limited. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
1 Stock Down Nearly 59% that Wall Street Expects to Soar 61% was originally published by The Motley Fool
