There has been lots of talk about Sea among investors, especially so, with the almost 90% plunge from its peak at around $350. At its peak with a valuation north of 200 billion US dollars in late 2021, SEA dwarfs the valuation of all 3 Singapore banks combined.
It has been a tough journey for SEA, as their valuations have taken a hit of close to 90%. With such an attention-grabbing drop, it led to us examine if SEA’s current valuation is worth a look at. SEA was highlighted in our recently published book, where it came to our attention when it was just trading at $10, but it has been a rollercoaster ride since then.
There have been many reports on SEA where they went in-depth on their business model, so we will just highlight their 3 main business which is namely: Ecommerce-Shopee, Digital Entertainment- Gaming(Garena) and Digital Financial Services- Maribank, SeaMoney etc. We will be focusing more on their outlook given what we have read so far and based on our analysis of their financial ratios.
Sea Financials
| Stock/Price | P/E | P/B | Price/CashFlow | Price/Sales | Debt to Equity | Interest Coverage | Current Ratio | Return on Investment |
| Sea/37.5 | 86 | 3.5 | 29 | 1.66 | 74% | 11 | 1.8 | 2.46% |
Looking at the financial ratios of SEA, it does not seem to be a real bargain from a value investing point of view. P/E of 86 and even the price to cash flow of 28 don’t look like a bargain at this juncture. However, they could just be turning around as Shopee was bleeding in the initial stages but has since managed to churn out a profit on an EBITDA basis. Do note that they were on a huge cost-cutting exercise recently which could have led to the profits in the ecommerce division.
This gives us hope that the trend will persist and with the network effect of their platform, better profitability days are ahead. Sea has been profitable on a net income basis over the last 3 quarters.
In terms of financial strength, the debt-to-equity ratio of 74% could send a warning alert. As of their latest financial update, SEA is holding on to 7.7 billion dollars of cash, cash equivalents and short-term investments. This would more than cover their total debt of close to 5 billion dollars.
Interest coverage is also healthy at 11 times but that is provided their earnings will be sustainable. Based on the latest management’s guidance, there would be more investments being made in the Shopee platform that could affect profitability.
Their current earnings would give us just a 2.46% return on investment which is not attractive at all. Given the competitive landscape, we are not too optimistic that this metric will improve drastically in the near term.
This is our recently published book where we touched on how we go about valuing stocks and our insights into the investment world. Authored by a Chartered Financial Analyst, it encompasses 2 decades of experience in the market that is condensed into this book. You could purchase the Kindle Ebook(Book Sample Pages) or the Paperback through these 2 links on Amazon.
Business Catalyst
We are still seeing growth of 20% plus for their E-commerce segment which is short of the phenomenal growth (above 50%) during the pandemic. Also, their digital financial services are growing at above 50%– quarter-on-quarter, this is the bright spot with Sea Money and their digital bank (Maribank) likely to provide a runway for further growth ahead.
Maribank has an ecosystem of Shopee sellers and customers to tap on to pitch their digital bank products. This would put them at a unique position as they do not just have to focus on the man of the street.
Things to Take Note
The gaming segment used to be the cash cow for the company while Shopee was at a cash burn stage. However, recent developments have cast the reliability of their cash flow-generating prowess. They saw a 41% decline in revenue for this division on a quarter-to-quarter basis in their latest result announcement. They will need new blockbuster games to replace the yesteryear blockbuster game such as Free Fire.
Recently, they managed to relaunch Free Fire in India after the ban in Feb 2022. Their relaunch date will be September 5th 2023.
In the e-commerce arena, there are also Lazada and Bytedance trying to grab market share. On the whole, we still prefer the overall shopping experience using Shoppe as compared to Lazada. As for Bytedance-TikTok, we see different approaches for their e-commerce as it is more through live streams and videos to sell items.
SEA have highlighted that they will be looking into investing to boost up their livestream segment.
Summing Up
SEA has plunged 90% since its peak in late 2021. The valuations have come down to more realistic levels but we would not deem it as a bargain. Forward P/E from different sources range from 20-35 which is acceptable given the optionality and growth prospects.
Their gaming division has taken a hit in recent times but we will not totally write it off as there could be development of new games in the pipeline. The relaunch of Free Fire in India could lend a boost to the bottom line as it was one of the most popular mobile games in India before their ban.
The bright spots in the company lie with its popular Shopee platform and its fintech initiatives- SeaMoney and Maribank which are still seeing healthy growth numbers.
In terms of the financial strength, we are comfortable with the different metrics, hence we do not see SEA facing a liquidity issue in the near to mid-term.
With the recent crash of their share prices, we would deem this more of an opportunity if there is a rebound, it could be fast and furious. No doubt, this would be deemed more as a growth stock, so it is not a stock that Benjamin Graham would come close to. Therefore, it should not be a concentrated position given the margin of safety is not validated, despite the 90% drop.
Disclaimer:
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.
