Has Sea Limited Stock Finally Escaped Choppy Waters?

Sea Limited (SE 3.25%) may finally benefit from its role as the premier e-commerce conglomerate in Southeast Asia.

Much like Amazon in the U.S. and MercadoLibre in Latin America, it is the leading e-commerce company in its respective region. That helped the stock peak above $372 at the height of the 2021 bull market.

Unfortunately, missteps such as expanding Shopee’s e-commerce operations outside of Southeast Asia and the reduced popularity of its Free Fire mobile game weighed on the stock during a brutal bear market. That led to a massive decline, and even with modest improvements, the stock sells at more than an 80% discount to its all-time high.

However, Sea Limited’s latest results strongly indicate its Garena gaming segment has turned a corner. Despite remaining challenges, the results suggest the e-commerce and entertainment stock might finally resume its bull market.

How Sea Limited fared

The company’s $3.7 billion in revenue grew 23% compared to year-ago levels. This is significant because it more closely reflects the double-digit growth rates of two of its three segments, Shopee and the fintech segment Sea Money.

Unfortunately, massive revenue declines in the gaming segment Garena left Sea with a modest overall revenue-growth rate in previous quarters.

That appears to have finally changed. While Garena’s revenue fell by 15% year over year, its bookings rose 11%, indicating that Garena’s pain may finally be over.

Additionally, Chairman and CEO Forrest Li said on the first-quarter 2024 earnings call that Free Fire is again the world’s most-downloaded mobile game, an achievement reached despite delays in getting the game relaunched in India. Assuming Free Fire returns to India, a country with 1.4 billion people, the gains for Garena — and Sea Limited overall — could be enormous.

Also, despite this good news, the company reported a $23 million net loss in Q1, down from the $87 million profit in the year-ago quarter. This came as sales and marketing spending increased 92% over the same period.

Concerns and valuation

Moreover, most of the sales and marketing spending applies to Shopee, and slashing this spending category was a factor in Sea turning profitable more recently. That leads to questions about whether the company depends on this spending to drive sales or if the spending involves logistics investments and network effects that will help it drive sales more organically in future quarters.

Despite such concerns, investors seem focused on the positives pertaining to Garena’s revenue. Consequently, the stock is again on the rise.

Furthermore, while the moves in and out of profitability leave it without a price-to-earnings (P/E) ratio, investors may like its valuation. The stock currently trades at a price-to-sales (P/S) ratio of 3.1. That is less than Amazon’s 3.3 sales multiple or the P/S ratio of MercadoLibre, which is currently 5.5. When combined with improving revenue growth, this could make Sea Limited stock an excellent value.

Should I buy Sea Limited stock?

Although Sea Limited continues to face rough waters, a period of smooth sailing could be in sight.

Admittedly, the much higher sales and marketing spending and the return of losses remain a concern. Investors need more clarity on whether Sea needs to spend heavily to sell goods or if improved logistics and network effects will drive higher sales and lower costs.

However, Garena’s massive revenue declines in the past, which were likely the factor deterring growth investors, seem to have abated. This likely means the gaming segment will return to growth. Also, having Free Fire return to India could accelerate that process.

Such improvements could ultimately mean that all three of the company’s segments move into growth mode, a situation that could bring about a robust recovery in Sea Limited stock.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has positions in MercadoLibre and Sea Limited. The Motley Fool has positions in and recommends Amazon, MercadoLibre, and Sea Limited. The Motley Fool has a disclosure policy.