Sea: I’m Buying While The Stock Keeps Falling (NYSE:SE)

A recent bull market is nicely underway, with traders shrugging off the specter of inflation and cheering the tip of price hikes. Development shares are scorching once more, with only a few exceptions – and amongst them is Sea (NYSE:SE), the self-dubbed “Amazon of Southeast Asia.”

This one-time market darling has seen its share worth crater by practically 30% this 12 months, owing to at least one factor: a slowdown in its gaming division, which has been its money cow for years as the corporate was ramping its e-commerce and digital monetary providers segments.

I final lined Sea in July, when the inventory was buying and selling nearer to $55 per share. Since then, the inventory has fallen by a recent ~30%, pushed by a poorly obtained third-quarter earnings print. And whereas I am definitely not cheering the corporate’s third-quarter outcomes and the opening in my portfolio has been painful to bear, I am renewing my bullish name on Sea and utilizing the dip as a shopping for alternative.

The headline purpose right here: I’ve at all times considered gaming as extra of a stopgap for Sea. It was vital within the firm’s early days, sure – particularly with how a lot money Free Fireplace, the corporate’s largest hit, introduced in through the pandemic when everyone was residence and taking part in video games. However Sea traders have all seemed to the long run for Sea’s alternative in e-commerce and digital funds when the corporate would change into not simply the Amazon of Southeast Asia, however its PayPal (PYPL) / Sq. (SQ) as nicely. And to me, that future could be very a lot alive.

The opposite core purpose I stay bullish on this title, regardless of the disappointing gaming outcomes: the corporate’s softer gaming income and earnings are offset by larger margins within the e-commerce division, lengthy a loss chief for the corporate, in addition to corporate-level layoffs which have truly helped Sea improve its EBITDA efficiency throughout a tough time.

Past the near-term drivers, here’s a reminder of what I view to be the long-term bull case for Sea:

• Sea operates within the enticing “tiger economies” with secular multi-year development tailwinds. Serving the fast-growing economies of Southeast Asia (Singapore, Indonesia, Philippines, Malaysia, and many others.). Outdoors of its residence nation of Singapore, Sea advantages from quickly modernizing infrastructure and a burgeoning center class. It isn’t ludicrous to check an funding in Sea to an early wager on Alibaba (BABA) and JD.com (JD) in China.
• Sea operates a conglomeration of enticing, worthwhile companies. The corporate’s gaming, e-commerce, and digital funds companies serve a large internet of shoppers and at the moment are every worthwhile in their very own proper – giving the corporate loads of development catalysts to seize extra share in Southeast Asia. These subsidiaries, significantly the extra nascent funds enterprise, get pleasure from synergies and cross-sell alternatives with one another.
• Price self-discipline. Not like many different hyper-growth corporations when backed right into a nook, Sea has proven expense self-discipline this 12 months in shedding ~10% of its headcount amid its gaming division slowdown.
• Extremely nicely capitalized. Sea has greater than $8 billion of money and investments on its stability sheet (for sizing, that’s roughly a 12 months’s value of opex for the corporate) to proceed investing in development and doubtlessly purchase new platforms.

The underside line right here: there’s lots to love about Sea in the long run, and with the inventory below a lot strain this 12 months, it is a good time to enter into this development titan at a lovely worth.

Q3 obtain

Like most do, we will begin with the dangerous information within the gaming division first.

Quarterly energetic customers noticed a slight sequential dip to 544.1 million customers, whereas the quarterly paid-user ratio fell sequentially as nicely to 7.5%. Whole bookings within the division had been barely up versus Q2, however down -33% y/y to $447.9 million. Income for digital leisure, equally, was down -34% y/y to $592.2 million. As a reminder, for Sea, bookings within the gaming division represents when gamers bought in-game objects or subscriptions, whereas income symbolize the utilization of these purchases.

Anecdotal commentary from the corporate’s core gaming franchises pointed to secure person engagement (no less than sequentially), with some pickup from non-Free Fireplace titles. Per Chief Company Officer Yanjung Wang’s remarks on the Q3 earnings name:

We’re completely happy to see that Free Fireplace maintains secure tendencies throughout each person and monetization metrics. A lot of our initiatives round enhancing the person expertise this 12 months, equivalent to lowering loading instances, have proven continued success. We’ve additionally additional deepened person engagement.

For instance, we not too long ago revamped Free Fireplace’s guild system to boost the social expertise for our gamers. With all these efforts, we noticed a better revival of churned customers and higher person retention. Certainly, Free Fireplace was essentially the most downloaded cell recreation within the third quarter globally, in response to Sensor Tower. We’re additionally happy to see wholesome tendencies for our portfolio of printed video games. We added recent, thrilling content material and enhanced the person expertise for these video games. New content material on Area of Valor obtained very optimistic person suggestions, leading to a brand new peak of quarterly energetic customers for the sport. One other of our printed video games, Name of Obligation Cell, achieved its highest quarterly bookings.”

It is value reminding ourselves that Free Fireplace was utterly developed in-house. Sea has the technical know-how to develop hit video games – and given time, it might produce one other to cut back its reliance on its unique golden goose.

Ends in the e-commerce division, in the meantime, had been far more sanguine. Income grew 18% y/y, pushed by a 5% y/y development in GMV.

The corporate believes that it gained market share within the quarter, and that share development was pushed largely by the broad rollout of Shoppee Stay – the place product sellers do video demonstrations of their wares. Sea administration famous that viewership hours on Shoppee Stay within the month of October had been triple that of June and that one in each 5 Shoppee customers in Indonesia had used the characteristic.

Economies of scale have tremendously helped the e-commerce enterprise scale, and the corporate notes that logistics prices per order are down -17% y/y. This has helped the corporate cut back its adjusted EBITDA losses to -$346.5 million, which is roughly one-third lower than within the year-ago Q3. This was, in flip, pushed by outperformance in Brazil – which provides us further hope that Sea could be profitable outdoors of Asia and in different hyper-growth economies as nicely.

You’ll be able to see as nicely within the chart beneath that Sea has made substantial cuts to common and administrative in addition to R&D bills, the results of layoffs that started within the tail finish of 2022 which have shaved off ~10% of its headcount:

The mix of decrease e-commerce losses and decrease company overhead helped the corporate produce a optimistic adjusted EBITDA of $35.3 million, versus a -$357.7 million loss within the year-ago interval:

Key takeaways

In my opinion, I like the truth that Sea is discovering methods to spice up adjusted profitability even when its most worthwhile phase is faltering. Whereas it is true that Sea has lots to show (lowering its reliance on Free Fireplace, enhancing e-commerce profitability in Asia, demonstrating development in non-Asia markets), plenty of pessimism is baked into Sea’s share worth at sub-$40 and it is a good time to enter into this inventory at a de-risked valuation.