Sea Ltd (SE) Stock: What to look for before investing in company that owns Free Fire

The widespread digital adoption has had a positive impact on the performance of consumer internet company Sea Limited (NYSE: SE), driving user growth and engagement. The Singapore-headquartered company is banking on the ongoing digital shift to meet growth targets after emerging as a pandemic winner, riding the success of its e-commerce and mobile gaming businesses.  

Stock Peaks

Last month, shares of the diversified technology firm, which owns popular game developer Garena and e-commerce platform Shopee, climbed to an all-time high. It is estimated that the stock, which closed the last trading session at $267, has the potential to grow in double digits over the next twelve months. Probably, SE has never been so attractive as it is now, but that doesn’t mean it is entirely risk-free.

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Read management/analysts’ comments on quarterly reports

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Market watchers in general are bullish on the company as they believe the stock has what it takes to return value to shareholders consistently. Moreover, the price is reasonable — though it is not cheap – and the recent pullback offers a fresh buying opportunity, especially to investors interested in internet/gaming stocks with growth potential.

Power of Free Fire

Gerena, Sea’s core gaming business, has been thriving on the blockbuster Free Fire franchise that continues to contribute handsomely to the top-line, especially in the Southeast Asia and Latin America markets where it has a strong footing. The emerging e-commerce business, with accelerating revenue growth, looks poised to give tough competition to Alibaba (NYSE: BABA) in the Asia-Pacific region.

Since the company is yet to become profitable – more than a decade after its inception – the stakeholders would be looking for updates on its strategy for a turnaround, which according to some analysts could happen in 2023. The elusive profitability is a cause for concern, considering the company’s high debt that stayed above $2 billion in the most recent quarter. For the leadership, strengthening the ecosystem further and expanding to new markets are the key priorities, which require heavy investment.  

Beyond COVID

To a large extent, future prospects would depend on how the COVID situation evolves and whether the current boom would be sustained in the post-crisis period. While experts believe that the new shopping behavior is here to stay irrespective of the pandemic situation, it needs to be seen what effect the market reopening would have on Sea’s entertainment business in terms of user engagement.

From Sea’s First-quarter earnings conference call:

“Looking ahead, we continue to plan for a deep pipeline of innovative content, fresh partnerships, and exciting e-sports activities to further and better engage with our ever-growing global communities of users. We are also working to ensure that our long-term gains for forming the pipeline remain strong. A significant number of our more than 1,000 in-house skin developers globally are constantly working on new ideas while we continue to engage with third-party game studios…”

Mixed Q1

The company entered fiscal 2021 on a mixed note, with net loss widening to $422.1 million in the early months of the year. That was despite a surge in revenues, which more than doubled to $1.76 billion. The bottom line was negatively impacted by a sharp increase in operating expenses. Excluding special items, EBITDA was $88.1 million, which marked an improvement from last year’s loss. During the quarter, mobile wallet SeaMoney witnessed strong adoption, and the number of paying users crossed $26 million.

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Sea’s stock traded higher in the early hours of Friday, continuing its recovery from the recent dip. The value more than doubled since last year though the stock experienced high volatility in recent months, mainly due to the ongoing tech selloff.