Source: Beast Finance Author: Beast Finance
Summarize:
(1) Sea Limited is one of the hottest stocks during the epidemic.
(2) According to our analysis, although Sea Limited's stock price has fallen sharply from its historical high, it is still overvalued.
The share price of Sea Limited (SE) has experienced a sharp decline since the end of 2021, and the current share price is more than 6 times lower than its historical high. Many investors may take the opportunity to buy, but due to its unattractive valuation and Sea Limited's revenue growth has decelerated significantly compared to previous years, Boldbeast Finance does not recommend it.
Sea Limited's financial situation
Although Sea Limited's revenue growth in the past nine years has been amazing, with a compound growth rate of 72%, and in the long run, Sea Limited's profitability indicators have also improved significantly. But on the other hand, 77 times revenue growth is still not enough for Sea Limited to achieve positive operating and free cash flow (excluding stock-based compensation).
Although Sea Limited has invested heavily in R&D, its SG&A expenses are three times the R&D expenses. So we like how the company has lowered its SG&A expenses and invested a larger portion of its revenue in R&D. This demonstrates that Sea Limited is focusing on building a sustainable long-term competitive advantage rather than focusing on short-term growth. An SG&A expense-to-income ratio above 30% suggests that Sea Limited has a lot of room for improvement in the upcoming financial year. That's a positive sign for potential investors.
From the perspective of quarterly earnings, we can see that the strong revenue growth momentum of Sea Limited has disappeared, and the year-on-year growth has been in single digits for two consecutive quarters. But one big positive sign is that the company's profitability metrics are improving, with two consecutive quarters of positive operating margins and leveraged free cash flow also turning positive last quarter, but this isn't the first time in the company's history, so we can't guarantee this will continue.
In the latest financial report released on May 16, although Sea Limited's revenue increased slightly, it did not reach a profitable level. While EPS also missed expectations, it was fairly steady, growing from -$0.80 to $0.45. This was primarily due to the improved profitability of Sea Limited's e-commerce business, which posted adjusted EBITDA of $207 million, compared to -$742 million in the same period last year. Both the e-commerce and fintech businesses showed strong growth in the quarter, but the decline in digital entertainment was mainly due to the quarter-on-quarter paying user ratio falling from 10% to 7.7%.
Sell-side analysts currently expect Sea Limited's revenue growth to continue to grow strongly. The consensus estimate for Sea Limited is to post quarterly sales of $3.3 billion, up about 11% year-over-year.
Sea Limited currently does not pay dividends and does not return funds to shareholders through share buybacks. Sea Limited's available funds are primarily used to foster growth and repay debt. It should be emphasized that Sea Limited's outstanding debt amount is lower than its cash balance, which means that investors can accept significant leverage, and Sea Limited's current liquidity indicators also look healthy.
Overall, we see many positive signs when analyzing Sea Limited's financial situation. But on the other hand, the uncertainty of Sea Limited's free cash flow is high and very unstable.
Valuation
Since the beginning of this year, Sea Limited's share price has risen by 15%, which is about one percentage point lower than the overall level of the US stock market. Due to the stock's very high overall price-to-earnings ratio, the market assigns the stock a low "D" valuation rating.
A comparative analysis with most companies in the industry shows that the stock is seriously undervalued. However, the company's revenue compound annual growth rate over the past 10 years has been as high as 72%, which means that the price-to-earnings ratio may not be appropriate for the valuation analysis of such an aggressive growth company. Through our valuation model calculations, it can be concluded that Sea Limited's current valuation is not attractive, and its free cash flow still shows signs of being very unstable.
Risks that need to be considered when investing in Sea Limited
Bold Beast Finance believes that the future profit trend of Sea Limited is the most worrying risk. While Sea Limited's ability to rapidly increase revenue growth is unquestionable, its historical profitability metrics have been erratic,
and Sea Limited's revenue growth has slowed down compared to previous years. Although the market expects that the growth rate of Sea Limited will remain stable in the next quarter, the large fluctuations in the growth rate will not add any certainty to the future growth model.
Conclusion
The financial data shows that Sea Limited has many positive trends, and the positive operating profit margin for two consecutive quarters is also a very positive signal. But our valuation analysis suggests that these positive factors are already priced into Sea Limited's share price. Therefore, we do not recommend buying Sea Limited shares at current prices.