1 Super Stock down 76% to buy Hand Over Fist in September

Sea Limited (SE -1.31%) operates in the e-commerce, digital entertainment and digital financial services industries, so its business grew when people were under lockdown restrictions at the height of the pandemic. As a result, its stock rose to an all-time high of $357 near the end of 2021.

But social conditions returned to normal shortly afterwards, and the economic climate also changed in 2022, when global central banks began raising interest rates. Sea Limited has made a necessary pivot to a more sustainable business strategy, focusing less on overall growth and more on profitability.

Investors tend to favor rapid growth when it comes to technology companies, so shares in Sea Limited are down 76% from their all-time high. But there is a firm rebound this year and I think it could be the start of a new long-term bullish trend. Here’s why Sea Limited shares could be a great buy this September.

Image source: Getty Images.

A triple threat in the digital economy

Sea Limited is based in Singapore and mainly serves markets in Southeast Asia, where the company says consumption is a key driver of economic performance. This is important because Sea is primarily focused on serving customers in all three business segments.

In the second quarter of 2024 (ended June 30), Sea’s e-commerce platform Shopee processed 2.5 billion orders, which was a 40% increase from the same period last year. The company takes a page out of Amazonbook by improving the efficiency of its logistics network, which can reduce costs and increase the frequency of orders.

During the second quarter, Sea said more than 70 percent of Asian orders were delivered within three days, with its cost per order down 8 percent from a year ago. Amazon has found that customers order more when they receive products quickly, so this bodes well for Shopee in the long run.

SeaMoney is Sea’s digital financial services platform, which has important synergies with Shopee. It lends money to sellers to help them expand and also offers buy-now, pay-later loans to consumers, which boost sales on the e-commerce platform. During Q2, SeaMoney registered more than 4 million first-time borrowers, which was double the number it added during the same period last year. Overall, the platform had $3.5 billion in active loans at the end of June, up 40% year-over-year.

Finally, Sea’s digital entertainment business is spearheaded by its game development studio Garena, home to the globally successful mobile game. Free Fire. The segment had 648 million quarterly active users in Q2, marking the second consecutive quarter of growth after a post-pandemic decline. Unfortunately, the average revenue per paying user fell to $10.20, which was the lowest level in a year.

Simply put, although people flocked to titles like Free Fire — which was the most downloaded game globally in Q2 — they seemed less willing to open their wallets compared to previous quarters.

Sea’s revenue growth continues to accelerate

Sea Limited generated total revenue of $3.8 billion in the second quarter, which was a 23% increase over the year-ago period. It was the fastest growth rate in two years and marked the second straight quarter of acceleration.

Most of this revenue came from the e-commerce segment, which generated $2.8 billion, representing a 33.7% increase over the year-ago period. SeaMoney generated $519.3 million in revenue, up 21.4 percent, while digital entertainment lagged behind, with revenue down 17.7 percent to just $435.6 million.

Sea increased its operating expenses by 28.7% year-on-year to $1.5 billion in Q2, which included a 57% increase in marketing expenses. This was likely the main reason for the company’s accelerated rate of revenue growth, and is a sign that management may return to a growth-oriented stance with less focus on profitability.

However, Sea still posted positive net income of $79.9 million in Q2, although this was down sharply from the $330.9 million net income generated in the year-ago period.

Investors should monitor how Sea balances revenue growth and profitability in the coming quarters. In theory, faster growth through heavy investment in customer acquisition may pay dividends in the future, but the stock market could show itself on the Sea if it returns to losing billions of dollars a year in the current economic climate.

That said, the company is in a great financial position, with more than $6 billion in cash, cash equivalents and short-term investments on its balance sheet. So it can afford to take some losses if that’s the path management chooses to take.

Sea Limited stock is cheap

Sea Limited’s stock is up 116% in 2024 so far, but as mentioned, it’s still down 76% from its all-time high.

Despite strong earnings this year, it’s incredibly cheap right now, according to a widely used valuation metric. Based on the company’s trailing 12-month revenue of $14.4 billion and its market cap of $47.6 billion, it trades at a price-to-sales (P/S) ratio of just 3.3.

Stock should be close triple only to bring its P/S ratio in line with its long-term average of 9.7 going back to when the company went public in 2017.

SE PS report data by YCharts.

Because Sea’s business relies heavily on consumer spending, the company could benefit significantly if the US Federal Reserve cuts interest rates in September, as expected. Other central banks around the world are likely to follow — Indonesia, for example, is one of Sea’s biggest markets, and its central bank is preparing for a cut before 2024.

With a strong cash position, accelerating revenue growth and an attractive valuation, investors could buy Sea Limited shares in September and hold them for the long term.