Is Sea Limited Stock A Good Buy For The Long-Term?

Seeking Alpha2021-09-08

Summary Sea Limited is a very high-quality growth stock that surprisingly receives less attention than Alibaba, MercadoLibre, and Amazon, even though it has outperformed all of them, hands down. We ...

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精彩评论

ShirlySuet
2021-09-08
ShirlySuet
Really
- Jjjjia:
  Buy
diversify
2021-09-08
diversify
never heard of this online shopping platform before. Whether it grows will be dependent on how it sets itself apart from the big players like shopee, lazada, etc
- kn01:
  it is shopee
ivy888
2021-09-08
ivy888
Like
TeckLeong
2021-09-08
TeckLeong
Of course
- ivy888:
  like
ping23
2021-09-08
ping23
pls like
terryvstitch
2021-09-08
terryvstitch
Like
- QINGG:
  Gd

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This performance is even more incredible because it came off an outstanding 2020, where it also outperformed with a 392% return.\nWhile the rest of its American and Chinese peers often received more coverage than this Singapore-headquartered company, it has been Sea which has been quietly delivering. It has been executing, expanding its Garena gaming ecosystem, and reaching new milestones. It's been scaling its e-commerce footprint to LatAm and demonstrating to Amazon(NASDAQ:AMZN) that they are not experiencing any reopening headwinds. This is in contrast to what Amazon indicated in its recent earnings. The company is also growing its Sea Money footprint, especially through the Shopee/Shopee Pay flywheel, as the company stakes its FinTech leadership ambitions against Southeast Asia's FinTech leader Grab(NASDAQ:AGC).\nAs a result of Sea Limited's incredible success, the group's China-born CEO Forrest Li is also now Singapore's richest man with a net worth of $20.3B.\nSE quant rating (momentum). Source: Seeking Alpha Premium\nWe have always reminded investors that Sea stock is one that you should never bet against even if you are bearish on its long-term prognosis. The stock has made one of the strongest upside moves we have seen for stocks in our growth portfolio. This is also corroborated by Seeking Alpha's proprietary quant momentum rating, giving it the best possible A+ grade on its most recent performance.\nGiven the company and the stock's stupendous performances so far, we think it's only apt that investors ask whether SE's future optimism has been largely priced in, which is especially important for new investors who have yet to add its stock, where we will highlight the analytical framework on how investors can use to consider the company's prospects moving forward.\nMonitor Its Revenue Growth Closely\nSea Limited quarterly revenue. Data source: S&P Capital IQ\nSea Limited quarterly revenue YoY growth. Data source: S&P Capital IQ\nSea Limited impressed with another awesome quarter of topline growth as total revenue grew 159% YoY on revenue of $2.28B. Its QoQ performance was also remarkable with a 29% QoQ growth, as the company shows that its gangbusters growth knows \"no limit.\"\nSea Limited GAAP quarterly operating margins. Data source: S&P Capital IQ\nFor companies like Sea, whose strategy is still focused very much on topline growth and building scale efficiencies in the process, we should not be too concerned with its negative operating margins, as long as the company clearly demonstrated that it could grow rapidly like in Sea's case, and also achieve economies of scale through ramping revenue as it seeks out its \"blue oceans.\" We also articulated this point in a recent article on Snowflake(NYSE:SNOW), which operates in a huge market with a massive opportunity to expand, and the firm has shown that it can execute its strategies very well to capture those revenue opportunities despite having negative operating margins right now.\nTherefore, Sea Limited has certainly struck the right notes here, and we see no cause for concern so far. What matters for investors now is whether the company is still expected to grow this rapidly moving forward.\nSea Limited revenue mean consensus estimates. Data source: S&P Capital IQ\nSea Limited consensus revenue estimates revision trend. Source: Seeking Alpha Premium\nReaders should easily glean that the Street upgraded revenue forecasts for the company after Q2's earnings release from what they projected post Q1 earnings. For example, revenue projection for FY21 has been increased by 11.5% to reflect the improved guidance from the company. Even though projections for FY24 to FY25 look rather tepid, readers should note that only three analysts covered the FY24 projections, while only two covered for FY25, compared to the 18-21 analysts who covered FY21 to FY23 numbers. As a result, we will also focus our discussion up to FY23 numbers to keep them meaningful.\nThe expected revenue CAGR from FY20 to FY23 is 59.1%, while it reads 40.1% from FY21 to FY23. Therefore, the market is still expecting Sea Limited to deliver remarkable topline growth rates moving forward.At the same time, we are cautiously optimistic about Sea Limited's future, under the skillful stewardship of Group CEO Forrest Li and his management team. The team includes his two very competent business unit chiefs Chris Feng and Terry Zhao. Feng was born in China and leads Shopee and Sea Money. He is a Stanford alumnus like Li and he was recruited from Lazada(NYSE:BABA)by Li in 2014. Feng is said to be a “very, very smart and very, very confident” person who “reacts quickly and has excellent abilities of recall.” Zhao is the president of Garena. Li has kept Zhao by his side since the company's inception. Li is unlike Alibaba's Jack Ma and prefers to keep a modest profile. Still, his team's execution has been nothing short of outstanding, and we see no reason to think otherwise moving forward for this founder-led company.\nKeep a Close Watch on Shopee's Adj. EBITDA\nQuarterly Adj. EBITDA. Data source: Company filings\nQuarterly Adj. EBITDA by segments. Data source: Company filings\nOf particular concern, though, is that the company's Adj. EBITDA turned negative for the first time since Q2'20 as the increase in Adj. EBITDA losses from Shopee were greater than what Garena could cover in Q2'21. Investors should be able to glean from the second chart where it shows that Shopee's Adj. EBITDA losses increased to $679.77M in Q2'21, representing a 64.8% QoQ increase, while Garena's Adj. EBITDA only managed a 3.3% QoQ increase in Q2'21.\nDespite this observation, the company highlighted that its Malaysia market had turned Adj. EBITDA profitable, joining its Taiwan market. Therefore, we believe the huge increase in burn rate for Shopee is likely in its largest markets by gross merchandise value (GMV), such as Indonesia and Thailand. The company also alluded to this in its earnings call as it emphasized:\n\n And in terms of sales and marketing and related to competitive dynamics, I think we are -- again, as we discussed it before, given our strong market leadership, we're in a good position now that our sales and marketing is more driven by our view about the efficiency of investment into various markets at various points of time, for example, any shopping event season, any particular opportunities to promote the brand, et cetera...\n And in terms of the cash burn...as we look at the market opportunities, the timing of the market, for example, in Q2, we have Ramadan season in our several largest markets including Indonesia.And this is a time where investment into the growth and to promote e-commerce adoption is very efficient. We have increased our buy frequency overall to more than 6x a month.\n And in Indonesia, it has exceeded 7x per month, which we believe is very healthy for a marketplace platform.\n\nShopee Indonesia 76th Independence Day poster (Shopee ada untuk Indonesia: Shopee is for Indonesia). Source: Shopee Indonesia LinkedIn\nNow, we emphasized Ramadan (which is not exclusive to Indonesia per se) because it's a massive annual event in Indonesia. We had a sojourn in Jakarta, Indonesia, for a year, and we can tell you it's one of the most important highlights in Indonesia's annual calendar. Therefore, we cannot further underscore the opportunities to boost sales during this important event. It shows that Shopee's management clearly understands its most important market very well, and Shopee also aligned its progress with Indonesia's progress as the country celebrated its 76th Independence Day on 17 Aug 21, as Shopee Indonesia reminded Indonesians that\"Shopee is for Indonesia.\"\nShopee Indonesia has quickly moved onto its next big 9.9 shopping event, and this time around, they recruited well-known Indonesian actor and martial artist Joe Taslim, who starred in the recent Mortal Kombat film as Sub-Zero. For readers familiar with Shopee's advertising strategy, the company often stars well-known local artists in its promotional campaigns. The ads are often quirky and dramatic, which helps capture the users' attention very easily and is often memorable. This recipe has served Shopee very well, and somehow its keen regional competitors such as Lazada and Tokopedia have found it difficult to emulate. We encourage investors and readers to continue keeping a close watch on Shopee's most important market moving forward.\nTherefore, while observing quarterly Adj. EBITDA moving back into negative territory wasn't exactly a welcome development; we need to consider the context. In Shopee's case, it was certainly an opportunity that they needed to undertake to take full advantage of the opportunity to boost sales during the important Ramadan festival which is mainly celebrated in Indonesia, Malaysia, and Singapore. Therefore, we wouldn't be too concerned over a quarter's development and start to be worried, but instead, we should continue to monitor Shopee's Adj. EBITDA's development over the next few quarters, and give the company some space to execute its e-commerce strategies.\nWatch for Advertising's Share of Revenue\nShopee Adj. EBITDA per order. Data source: Company filings\nShopee quarterly take rate. Data source: Company filings\nAs a result of Shoppe's increased Adj. EBITDA losses due to its heavier burn rate for Q2'21, we observed Shopee's Adj. EBITDA loss per order regressed to $0.41, from $0.38 in Q1'21. However, readers should note that this only represented a 7.9% QoQ increase, which is certainly much lower than the 64.8% QoQ increase in total Adj. EBITDA losses. This clearly shows that Shopee is benefiting from greater scale efficiencies, despite the larger burn rate due to the heavier investments in the quarter. In addition, the Adj. EBITDA loss per order was also not \"that bad,\" as it was still in line with Q4'20's metric. Moreover, we have certainly seen worse days, and this was nothing spectacular.\nImportantly, we noticed a marked and consistent improvement in Shopee's take rate for Q2'21 as it improved to 6.7% compared to 6.1% in Q1'21. Sea Limited was very clear on its earnings call where this improvement was mainly attributed to as it emphasized: \"This deepening monetization was driven mainly bygrowing merchant investments in marketing and advertisement on the Shopee platformto attract better and serve buyers.\"\nWe think this is a critical development in Shopee's progress as it continues to scale rapidly. For example, in our recent Amazon article, we showed just how massive the advertising opportunity is for the company as it's now Amazon's fastest-growing revenue driver, and 90% of its ad revenue is centered on its e-commerce marketplace.\nShopee quarterly sales & marketing (S&M) margin. Data source: Company filings\nTherefore, even though we saw a marked increase in Shopee's S&M margin from 49% in Q1'21 to 56.2% in Q2'21 (14.7% QoQ increase), we encourage investors to consider the company's overall Adj. EBITDA per order, which shows that the company has tremendous leverage to engage in aggressive marketing activities through better monetization in Shopee's platform.\nGarena's Bookings Growth Seems to Be Slowing Down\nGarena bookings. Data source: Company filings\nThe company reported a fantastic quarter for Garena again as it topped several charts. Sea highlighted that Garena's Free Fire continues to maintain incredible momentum in Southeast Asia, LatAm, and India as the highest-grossing game. In the US, Free Fire was \"ranked the highest-grossing mobile battle royale game for the past two quarters based on App Annie. Additionally, Free Fire was the second highest-grossing mobile game in the U.S. on Google Play across all games categories in the second quarter as well.\"\nWhile this is certainly impressive, we prefer to look at the global perspective on how Free Fire has performed against its peers. According to Sensor Tower data for H1'21, while Free Fire is the #2 top gross gaming app behind Moon Active's Coin Master on Google Play, it ranked only #8 in overall revenue when we included the App Store's top-grossing gaming apps such as Tencent's(OTCPK:TCEHY)Honor of Kings (#1 overall) and PUBG Mobile battle-royale game (#2 overall), and also Roblox (#4 overall)(NYSE:RBLX). Therefore, while Free Fire has been doing well in markets where the Android operating system (OS) is dominant, it hasn't performed quite as well in North America, where iOS is the leading OS (as we showed in our Digital Turbine(NASDAQ:APPS)article appendedhere). The US is the largest and the most important mobile gaming market, as it accounted for28%of the mobile gaming market share in 2020. Garena has never been a strong performer on iOS, and if the company can improve its performance in the App Store, the boost could be tremendous to Garena.\nWhile the company's bookings for Q2'21 remain strong as it posted a QoQ increase of 9.1% to $1.2B from $1.1B in Q1'21, the company only raised the guidance from $4.5B to $4.7B in bookings for FY21. When we consider H1'21's collective bookings of $2.3B, the company is therefore expecting H2'21 bookings to come in at $2.3B, which means they aren't expecting any material growth in bookings for the rest of the year as compared to H1'21. This was also picked up by one of the analysts on the conference call, and Group Chief Corporate Officer Yanjun Wang reminded:\n\n We believe the overall guidance showed a more than 40% year-on-year growth compared to last year, which is also a record year for us with the commencement of lockdown. And I think this is a very strong performance already. And our focus, as you can tell from game and the metrics we have indicated as well as our views in terms of how to grow our gaming platform,\n is to continue to first and foremost to grow our user base and also pay user baseacross the various markets in the world as we continue to see strong potential growth. (from Q2'21 earnings call)\n\nQuarter paying users (QPU) / Quarterly active users (QAU). Data source: Company filings\nAverage Booking Per User (ABPU) and Average Booking Per Paying User (ABPPU)). Data source: Company filings\nThe company's bookings trends can certainly be observed on a per-user or per paying user basis. The ABPPU has certainly been trending down, which reflects a drop in monetization per paying user, which is important as paying users are the ones that generate revenue for Garena. However, we didn't really observe a meaningful drop in the ABPU trend, despite the drop in ABPPU. This shows that even though there is \"less meat\" per paying user, newly minted paying users have been supporting the bookings, which we can certainly observe from the first chart where the QPU / QAU ratio has been consistently increasing, indicating that Garena has been getting better at converting and monetizing its huge non-paying users base. We think this is of huge significance when we consider that only 12.7% of users are paying users as of Q2'21, leaving the company massive opportunities to continue \"working its magic\" on monetizing the non-paying users. On this matter, Sea Limited was unabashed as it emphasized: \"...Our past track record has shown that we're generally good at commercialization in even markets that are known to be difficult for commercialization. So we don't really worry about not being able to commercialize the content down the road. But our focus continues to be growing the user base and making this an even larger platform that allows us to really tap on into it to build a stronger game ecosystem with very strong social elements in it.\"\nBuilding up eSports as a Social Platform\nWe shared in our previous deep dive on Garena (link to the article is appendedhere), where Garena's ambitions are beyond just a mobile gaming app. The company has huge ambitions, and they have already been using eSports as the basis to build the community for its gamers and developing it into a social platform that perhaps is similar to what Roblox has advanced. Garena has already highlighted previously its ambitions on building this cohesive and broad social community as it emphasized:\n\n...developingit into a social platformwhere people not only come to play the core gameplay, but also enjoy other modes: hangout, listen to music, social lives… So our focus is to continue to promote a massive-based online platform and online community and provide them with content and opportunities for socializing engagement, try out different modes of games, try out different characters, avatars or having different ways of playing.\n\nThe revenue in global eSports is not that significant as it's only expected to reach $1.62B by 2024, as we highlighted in our Garena article. Still, the whole strategic intent is to build the all-encompassing social platform that will drive incredible engagement, platform stickiness beyond what a typical gaming app can do. Importantly, the company is also headquartered in Singapore, where the Singapore government is focused on building the global hub for eSports, as Southeast Asia is expected to be the fastest-growing region for eSports, and the city-state recently opened a huge 12,000-sqft eSports experience center, as the Singapore Tourism Board emphasized:\n\n Our world-class events and digital infrastructure have also made Singapore an attractive location for the industry to hold gaming and e-sports events here. The government will continue to support companies as they push boundaries through experimenting with new and immersive content formats and business models, as well as level up the quality of our local talent to become leading creators of world-class content.\n\nGarena also recently brought in \"globally renowned DJs Dimitri Vegas & Like Mike, Alok, and KSHMR for Free Fire’s 4th-anniversary theme song, ‘Reunion,’\" following successful strategies adopted by Roblox in its metaverse development, and we think Garena is really still very early in its opportunity to develop its own metaverse.\nSea Limited Stakes Its Claim On MercadoLibre's LatAm Leadership\nWithout a doubt, the one that generates the most interest is the company's foray into LatAm, which Sea Limited recently updated that it has seen tremendous progress. We did a deep dive recently on this topic, and we encourage you to refer to our articlehere. While we think MercadoLibre(NASDAQ:MELI)is the undisputed e-commerce and FinTech leader in LatAm, especially in LatAm's most important market: Brazil, Shopee's progress has been truly remarkable as it's now the #2 ranked e-commerce app in downloads in Brazil according to App Annie. However, although Shopee is surely making meaningful headway in Brazil, MELI is a different competitor than Tokopedia and Lazada. MELI understands LatAm's e-commerce space comprehensively and has a very impressive logistics and fulfillment network that is second to none in LatAm's notoriously challenging logistics infrastructure. Sea Limited also noted this, but the company thinks that it will be able to overcome these difficulties as it continues to invest in LatAm, which will help these third-party logistics providers to improve their efficiencies and competencies over time and close the gap with MELI as SE emphasized:\n\n ...There hasn't been a lot of volume or traffic broadly generated across different platforms, then probably there is also a lack of initial growth opportunity for logistics. But on the one hand, we are also hopeful that with the growing e-commerce scene in the region and more focus of our global investors into the growth opportunities in the region, we may also see similar trends in those markets. And this is hopefully some contribution we can make to the market in terms of bringing more opportunities, bringing more digitization as well as e-commerce ecosystem that helps not just growth of Shopee but also growth of the surrounding services, including 3PLs within the region. And we've been partnering with 3PLs in our region very successfully in growing the e-commerce ecosystem. And at the same time, these third-party partners also enjoy the very strong growth on their end as well and the close partnership with Shopee. We are very happy to continue to adopt that model going forward in Brazil or the new markets as well. (from Q2'21 earnings call)\n\nWe have indeed seen this great partnership between Shopee and its logistics partners in Southeast Asia, so much so that one of its key logistics partners in Indonesia:J&T Express, is on track for its own IPO either in Hong Kong or the US. Therefore, while MELI certainly has the important lead in logistics right now, we believe it's only a matter of time the logistics infrastructure in LatAm improves with Shopee's involvement if it is willing to adopt the aggressiveness of its approach with Southeast Asia.\nMELI Commerce Take Rate. Data source: Company filings\nIf we consider MELI's commerce take rate as compared to Shopee's take rate, readers can easily observe the incredible monetization opportunities that are available in LatAm, and we can easily understand why Sea Limited is so keen to carve out MercadoLibre's leadership there because it's just so attractive. We think as Sea Limited gets more aggressive in its marketing in LatAm, MercadoLibre will start to feel the pressure to rein in its lucrative take rate to compete with Shopee's aggressive marketing tactics.\nShopee has engaged international film star Jackie Chan for its global 9.9 campaign, and its Brazilian version (see above) has received even more views (3.3M) than some of its Asian counterparts that we last surveyed: Indonesia (1.2M views) and Singapore (1.6M views). We think Shopee has the potential to inflict huge damage to MELI's highly lucrative take rate as its Southeast Asian operations have achieved significant scale, and we think they are ready to take on LatAm's e-commerce leader with confidence. Readers should note that Shopee's e-commerce operations are way larger than MELI as Shopee boasts an LTM GMV of $48.8B as compared to MELI LTM GMV of $25.6B.\nValuations Are Never Going to be Cheap\nWe used a blended comps valuation comprising its EV/Fwd Rev multiples and its EV/Fwd EBITDA multiples using the following companies in the comps set: Amazon, Tencent, Roblox, MercadoLibre, and Square(NYSE:SQ).\nUsing an aggressive valuation approach based on FY23 consensus estimates of EBITDA and Revenue, we arrived at an implied fair value of about $336.19 (mid-point) under the EBITDA multiples approach and $352.62 (mid-point) under the Revenue approach. Averaging out those fair values will give us a blended fair value of $344.41, which indicates a potential downside of about 2.5% from its last closing price of $353.36.\nReaders should also note that we have used an aggressive approach and have not considered a reasonable margin of safety. So, in essence, SE stock looks expensive right now, even though we don't expect it to be cheap for a high-quality growth stock like Sea Limited.\nSE Stock Price Action and Trend Analysis\nSE stock price action (weekly).\nThe rapid ascent of SE stock has left price action investors with little opportunities to add more exposure. However, we have still taken the opportunities in May to add more exposure to our portfolio and haven't added anymore since.\nWhile we have not witnessed any indication of a momentum shift in SE stock, we seriously don't think we will even consider adding exposure at this price level, as our aggressive valuation approach has shown us that quite a bit of the optimism has already been priced in. The stock is also starting to show flashes of flush-up price action that are indicative of potential bull-trap scenarios. While the price action has not been resolved yet, we are still monitoring for opportunities to perhaps enter cash-secured puts at more reasonable strike prices relative to the expected premium collected to try and take advantage of SE stock's incredible momentum.\nHence, we hope that we have demonstrated in our earlier sections that Sea Limited is definitely in the early innings of its market opportunity. Still, the level of optimism in the stock will need some leveling off first so that long-term investors can add exposure at a more reasonable price level.","kind":"news","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":880474382,"gmtCreate":1631077269746,"gmtModify":1631891106741,"author":{"id":"3582360052677778","authorId":"3582360052677778","name":"ShirlySuet","avatar":"https://static.tigerbbs.com/57d93e0a20280806b45e744b5e2a11cb","vip":1,"crmLevel":4,"crmLevelSwitch":0,"idStr":"3582360052677778","authorIdStr":"3582360052677778"},"htmlText":"Really","listText":"Really","text":"Really","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":1,"repostSize":0,"link":"https://laohu8.com/post/880474382","repostId":1120889633,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":5790510,"gmtCreate":1631080291287,"gmtModify":1634805564206,"authorId":4087709618925430,"author":{"id":4087709618925430,"idStr":"4087709618925430","authorId":4087709618925430,"name":"Jjjjia","avatar":"https://static.tigerbbs.com/25215d9b4b22838734cba07948cafe46","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":880474382,"type":1,"supId":0,"prevId":0,"content":"Buy","text":"Buy","html":"Buy"}],"langContent":"EN"},{"id":880463590,"gmtCreate":1631072938510,"gmtModify":1631891157073,"author":{"id":"3584861659205722","authorId":"3584861659205722","name":"diversify","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":4,"crmLevelSwitch":0,"idStr":"3584861659205722","authorIdStr":"3584861659205722"},"htmlText":"never heard of this online shopping platform before. 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