Sea Limited shares jumped 385% in 2020: is it a buy for 2021?
One of the top performing ecommerce stocks this year has been online gaming, ecommerce, and the digital payment platform. Limited sea (NYSE: SE). Sea Limited is the rising star of Southeast Asia, a region that includes Indonesia, Vietnam, Thailand, the Philippines, Malaysia, Singapore and Taiwan.
The COVID-19 pandemic has prompted more and more Southeast Asian consumers to order products through e-commerce for the first time this year, while using more digital payment solutions – not to mention being stuck at home playing video games. These trends have helped these industries around the world, but in a region where internet connectivity and e-commerce were largely under-penetrated at the start of the year, Sea’s growth has been absolutely supercharged.
But after such a big rally in stocks, can Sea continue to climb in 2021?
The recent momentum is breathtaking
Without a doubt, Sea’s recent results have been absolutely amazing. In the third quarter, the company’s digital entertainment group, which includes its Garena video game platform, increased revenue by 72.9%. However, part of this segment’s revenue is linked to subscriptions, some of which are prepaid. The company’s overall digital bookings, which includes revenue growth as well as new subscriptions that will be accrued in future periods, grew even more than 109.5%, foreshadowing massive growth not only today but also worldwide. ‘to come up.
This segment is also very profitable, with EBITDA margins adjusted to 61.9%, which Sea uses to fund its aggressive expansion into e-commerce. In the last quarter, the Sea’s Shopee e-commerce platform increased its revenue by 173.3%. While the company continued to rack up losses as it invests aggressively to gain market share, there were some promising signs of profitability. First, this revenue growth greatly exceeded the gross cargo volume (GMV) growth of 102.7%, implying that Sea’s utilization rate and marketing revenue is growing faster than GMV. Second, management revealed that its loss per order fell from $ 0.79 a year ago to $ 0.41 last quarter.
In addition, more and more people are using Sea’s digital payment solution to transact on Shopee. Although tiny compared to its other segments, SeaMoney increased its revenue from just $ 1.7 million in the quarter of last year to $ 14.4 million in the last quarter. Management revealed that over 30% of Shopee’s mobile orders were placed with SeaMoney in October. And earlier this month, Sea was got a digital banking license by the Monetary Authority of Singapore, the first award of its kind in the region.
Can Sea continue to climb in 2021?
Short-term movements in the stock market are completely unpredictable, so it’s hard to say whether Sea Limited will continue to climb as vaccines roll out, or if it will experience a completely normal pullback. That wouldn’t be a surprise for a company that trades at a rather high 25.2x turnover. The real question is whether Sea Limited is overvalued in relation to its long-term growth prospects.
A useful tactic in evaluate the growth stocks in turmoil involves evaluating a company based on its market capitalization against its overall growth prospects, rather than a simple P / E ratio or price / sales ratio.
Today, Sea Limited has a market capitalization of approximately $ 98 billion. However, that is still lower than not one but several of the big internet giants in China, which have market caps of several hundred billion in just one country.
Sea Limited is even smaller than all of these companies, in part because of China’s huge size advantage. In 2019, the countries served by Sea Limited had a population of just over 600 million, compared to 1.4 billion in China, or just under half. However, Southeast Asia’s GDP of $ 3.6 trillion is only a quarter of China’s $ 14.3 trillion.
This is because China is more advanced in its economic growth and technological penetration. Even after Southeast Asia added 40 million new internet users in 2020, its penetration is still only 400 million out of 600 million people. Of those 400 million, even fewer regularly use e-commerce services. According to a recent Forbes article, less than half of these Southeast Asian netizens purchased products online last year.
If these Southeast Asian markets eventually catch up with China further, both in terms of GDP per capita and internet penetration, major internet players like Sea could see their market capitalization climb to the levels of the major ones. Chinese actors.
If Sea firmly establishes itself as the leader in the region, in the same way that Alibaba or Tencent dominate China, then even applying the proportion of a quarter to their market caps (since China’s GDP is 4 times that of Southeast Asia), could give a value for Mer of 150 to 175 billion dollars in the medium term, or 50 to 75% increase even from here.
Will Sea overthrow its competitors and dominate Southeast Asia?
Of course, Sea also has competitors, especially the old e-commerce platforms Lazada and Tokopedia. Yet all segments of Sea appear to be strong. This year, Shopee has achieved a leading position in e-commerce, not only in the region as a whole, but in just about every country in which it operates, with a share of 30-60% depending on the country in question. .
Shopee’s rise from zero in 2015 to the region’s leading e-commerce player today is a remarkable achievement. It also shows that management likely has an advantage over rivals, whether in terms of the business model or the detection of human talent – likely both.
It gives me confidence that Shopee can maintain or increase its leadership position in the market and dominate the region in the same way that Alibaba or Tencent dominated China. If that happens, Sea Limited could very well achieve its current valuation and beyond.
So, if you are considering a position in Sea, but feel you’ve missed the boat, recent results and the company’s ever-growing opportunity mean that interested investors shouldn’t hesitate to take at least a small position, keeping an eye out for buying dips in the New Year.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.