Sea Limited: 3 Reasons You Should Own This Monster Growth Stock

Summary

• Sea's Garena still holds a lot of potential for further growth and profitability.
• The company's business is supported by secular growth trends.
• The MSCI inclusion should act as a near-term catalyst.

Photo by WestWindGraphics/iStock via Getty Images

Thesis Summary

In my latest article on Sea Limited (NYSE:SE), I discussed the overall business opportunities of the company, and why I am bullish on this Southeast Asian growth story. Today, I'd like to expand on this analysis, offering three more reasons why you should consider adding SE to your portfolio if you haven't yet. One relates to the core business potential, another looks at shifts in market dynamics, and the last one is an upcoming catalyst that could easily send the stock up in the next few weeks.

Sea: The undisputed King of eSports

First and foremost, I'd like to talk about Garena, which constitutes the "Digital Entertainment" segment of the company. As I pointed out already, Garena and Free Fire are the crown jewels of SE. Its revenues are growing fast and it is the main source of cash flow for the company. The question I posed before was; what if the company can't replicate the success of Free Fire? This is certainly a risk, but today I'd like to look at the opportunities by instead asking: What if SE can leverage its audience and further grow and monetize Garena?

In this regard, we saw some very encouraging news last week at Garena World's first virtual edition, which drew in over 1.2 million attendees and 40 million viewers. The event showcased the kind of fanaticism that Garena creates, and it was an opportunity for the company to cement its leadership position as an eSports organizer, and showcase two of its upcoming games, "Undawn" and "Fantasy Town".

I am trying to point out here that SE is, by some measures, the most successful eSports company in the world (Free Fire was the most downloaded game of 2020). The eSports segment is growing fast, and SE is set to ride this wave:

Source: Statista

According to data from Statista, the eSports market could achieve close to $1.61 billion in revenues by 2024. This implies a CAGR of over 14% from 2021 to 2024. Furthermore, we have to understand that eSports has a lot of potential due to its target demographic.

Source: Newzoo

Gaming and eSports are especially popular with the younger generations, specifically people in their teens, twenties and early thirties. In 5-10 years though, this demographic will be the main revenue creators and spenders in the economy, which bodes very well for SE. It might seem ludicrous now, but a world where top eSports competition garners the same levels of viewership and revenue as the NFL is in the cards.

So, while Garena's Free Fire success could be hard to replicate, the more important thing to focus on is the fact that Sea is one of the most relevant companies in one of the fastest-growing market segments right now. SE is often compared to Amazon.com (AMZN) or Alibaba Group Holdings (BABA), but it also has all the makings of a future Tencent Holdings Limited (OTCPK:TCEHY).

Momentum is shifting

Moving on to another segment of the business, digital commerce, we have seen some very encouraging results coming from companies in this sector, which makes me more bullish than ever on Shopee's prospects. Shopify Inc. (SHOP), which I wrote about here has had an outstanding quarter, beating on revenue and non-GAAP EPS. Granted, Shopify and Shopee are not the same, but it is still encouraging to see that, in what is known to be the weakest quarter of the year, Shopify doubled its GMV.

But this trend is not limited to Shopify. Amazon, which I think is a better comparison to SE, saw revenues increase by 44%. What we are seeing is clear evidence that COVID has brought about a real and long-lasting shift in consumer spending, accelerating the move to online. According to Statista, worldwide eCommerce GMV could reach $6388 billion by 2024, and SE stands to gain massively from that, given its presence in South East Asia and now Latin America.

Shopee is the go-to marketplace for consumers in these areas and has grown GMV by 113% in the last year. While profitability is still an issue, companies like Amazon are proof that margins in this sector, while thin, are possible. For now, Shopee has to focus on growing its size, which it can do thanks to all the free cash flow generated by Garena.

MSCI Inclusion

Lastly, as I mentioned in the introduction, I would like to mention one significant catalyst that SE could experience in the next weeks or months. Starting in May, the stock is now eligible for inclusion in the MSCI Singapore Index, which tracks the performance of large- and mid-cap companies in the Singapore market. The inclusion of SE in the index could lead to significant inflows of capital into the stock.

With Sea assumed to hold the largest weight in the index post-rebalancing at about 20 per cent, its stock would take over the current top position of DBS. This could potentially translate into US$2.5 billion in passive inflow, said CGS-CIMB based on its estimates.

Source: BusineesTimes.com

With that said, CGS-CIMB proposes a price target of $315 for the stock based on this inclusion as well as higher gaming multiples and higher monetization at Shopee.

We have known about the possible inclusion for a while, and SE stock did jump over 8% when this possibility was first announced back in November, but now it is becoming reality, and demand for the stock will literally and automatically increase once the stock is included in the MSCI.

Takeaway

It's clear, in my opinion, that Sea Limited has a bright future ahead of it. As I already mentioned before, SE is still growing fast, and I am especially encouraged by the investment prospects brought about by Sea Capital. On top of that, we have secular trends underpinning growth in eCommerce and eSports, and the imminent catalyst of the MSCI inclusion. I suggest you act now before it's too late.

Analyst’s Disclosure: I am/we are long SE, SHOP, BABA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[stanley goodspeed]

Incredible results just reported.
This just gets better and better.

[blackstar408]

Covid safe

Gaming (egaming) , Fintech (banking), E-commerice - what is not to be bullish about? Only a idiot would think this is a bear overvaluation. It takes money to build up.

[monster94]

Thats a steep valuation on the stock. About 30x sales. 😲 Leaves very little room for a margin of safety

[ejung2]

@monster94 It’s better to use forward estimates rather than trailing sales for growth stocks. P/S is cut to ~15 and more likely ~12 if they beat estimates like they likely will. That’s fair with 88% growth this year.

Using 2021 estimates is particularly important when we’re nearly halfway through the year, no one is thinking about 2020 anymore.

[cdgingrich]

Great company that is WAY over-priced.

[Perciad]

@cdgingrich wait for the crash & contaigon

[stanley goodspeed]

@cdgingrich That is what I said about Amazon 20 years ago.
That mistake cost me an absolute fortune.
SE will be much higher in future years.
Day to day fluctuations mean nothing.
Just buy the stock and sit back and you will be very happy.

[Michael_Shan]

Can someone shed light on:
Garena DAU/MAU, potential user base in south east Asia. Is it approaching saturation because of its already massive impression and participation in the region?

What are the strategies and visible observations that showed the Garena user base is adopting its ecommerce and fintech products?

[CrimsonPhoenix]

Love what this company has been able to do so far in such a short time. Long SE !

[1winner]

This is a never sell. People in SE Asia love Shopee like nothing I've ever seen. This will no doubt be a $1T+ company in 10 years...

[yieldhunter196]

@1winner hope so ;)

[Nick Cox]

@1winner
Shopee is the potential weak link of the company I think.SE continue to pour big money into it and it continues to burn cash and lose money.It may prove to be a winner or it may get out-spent by Alibaba and Amazon.

[reggin]

@Nick Cox you are the weaklink

[jvpiter]

I am guessing this will be half a trillion in a few years, ie $1,000 share price if things continue to align well

[Moreno C]

Hi, could you expand on why Sea Capital is important? It seems to me that investing in startups, while potentially lucrative, is also risky. Why not invest in itself instead?

Thanx.

[albertciampi]

@Moreno C I agree. Even though it is growing rapidly it will be losing money for many more years to come.

[RCSTOCK]

Owned it. Sold it. Then realized I was an idiot and bought it back. Now holding strong. Up 300%+. Expect it to be 3000% in the not too distant future.

[jaug1]

Negative earnings, negative ROIC, issuing lots of new shares every year, “act now before it’s too late.”

Irrational exuberance.

[jvpiter]

@jaug1 earnings do not matter when a company spends them to expand or grab market share. Time and time again this industry has shown that market share is what matters which translates to almost guaranteed high earnings later on

[Darren Prior]

@jaug1 heard the same argument about Amazon back in the 90s

[cdgingrich]

@Darren Prior No. A little over a year ago, SE was $50. It is $250 today. Irrational exuberance.

[fm.dividend]

Long SE since 40-50s.

I'm holding till the day I retire. So excited to see this 3-headed monster grow to be like Amazon