As far as growth stories go, Sea Limited (NYSE:SE) stock has one of the better ones in the market. In fact, Sea Limited has three of them.
The Singapore-based company offers platforms for gaming, e-commerce and payments. All three have significant potential as adoption grows in Asia and beyond.
Admittedly, the market has figured out the story to some degree. SE stock gained a whopping 255% in 2019. It’s rallied another 182% so far in 2020.
As a result, I recommended last month that investors perhaps wait for a dip. That dip may be on the way, as SE stock has retreated in recent sessions. But even above $100, the entry point is reasonably attractive. Sea Limited needs to grow into the current valuation — but it has multiple ways to do so.
Three Growth Businesses
Last year’s results underpin the case for SE stock. The Digital Entertainment segment — Sea’s gaming business — saw adjusted revenue increase 167% year-over-year.
Incredibly, Digital Entertainment was the weaker of the two businesses, at least in terms of growth. The e-commerce business, backed by Sea’s Shopee platform, saw its top line more than triple.
There are not many businesses out there growing revenue at a 160%-plus clip. Sea, at least in 2019, had two. And another may be on the way.
Sea has rolled out payments and financial services as well. The company’s mobile wallet cleared $1 billion in payment volume in the first quarter, an important milestone. And the company is competing for a digital banking license in Singapore.
This is a hugely attractive collection of businesses. Perhaps more importantly, it’s a hugely attractive collection of end markets. And the novel coronavirus pandemic may prove a tailwind for all three.
SE Stock Gets a Boost
In that context, the huge gains so far this year make some sense. After all, each of Sea’s markets should benefit from the current crisis.
The boost to gaming is obvious. Stay-at-home orders in Asia no doubt created new gamers. And it boosted adoption of Sea’s self-developed mobile game, Free Fire. That game hit a record of more than 80 million peak daily active users, according to the first-quarter earnings release.
E-commerce adoption is only going to rise at a faster pace. That’s one reason why Amazon (NASDAQ:AMZN) has soared. Admittedly, its cloud business has been a contributor as well.
And digital payments, already widely adopted in Sea’s core markets in Southeast Asia, will see further acceptance.
This was an impressive story coming into 2020. It might be even better now.
Cause for Caution
There’s a way to think of just how attractive Sea is as a business. The company is, from a broad standpoint, a combination of Shopify (NYSE:SHOP), Electronic Arts (NASDAQ:EA) and Square (NYSE:SQ) rolled into one.
Admittedly, that’s a bit of an exaggeration. But there’s some truth to it. And it’s worth noting those three companies have a combined market capitalization of over $200 billion. Sea’s market value is barely one-quarter that figure.
Still, there are risks here. Valuation is steep: The stock trades at about 17x trailing 12-month adjusted revenue. The company remains unprofitable, though investments behind the business are a key factor.
The payments business will see intense competition, with Alibaba (NYSE:BABA) targeting the region with its Alipay offering. The backing of Tencent (OTCMKTS:TCEHY), a major shareholder, will help Sea compete with giants. But there’s a lot of work to do on the financial side.
And, as noted, SE stock has weakened of late. It has dropped 9% in just the last four sessions. Investors should be rooting for those declines to continue. Sea Limited stock is never going to get cheap, but even a little bit cheaper should be good enough for a buy.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.
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