Share prices of Singapore-based Sea Limited(NYSE: SE) have whipped up and down in 2023, and they've been down more often than up. Recent financial results, however, are actually quite good.
And yet investors aren't encouraged by these recent results. They're not looking back, but rather they're looking ahead to the future. And in the future, investors are worried about a stormy sea of competition.
Investors are doing the right thing by looking ahead -- investing is about the future, not the past. But I believe they're drawing the wrong conclusions. And if I'm right, it could make Sea a great stock to buy now.
First, the big picture
When interest rates were near zero, Sea didn't care about turning a profit. Rather, it focused on revenue growth. And one might say the company was successful in both areas. Its top-line growth rate frequently was in the triple digits but net losses deepened with each passing year.
After interest rates skyrocketed, it became apparent that the economics of its business model had changed. Therefore, Sea's management pulled back on growth and prioritized profits. The chart below shows that growth has slowed to a single-digit pace but profits have soared.
The good news is that Sea's business is now self-funding, which is a very healthy long-term position to be in. The bad news is that the market wants better growth and has consequently abandoned the stock.
For evidence of this, consider that Sea stock currently trades at a very reasonable price-to-sales ratio of just 2, which is also an all-time low.
If Sea could find a way to improve its growth rate without decimating its bottom line, then the stock could be a coiled spring. And fortunately for today's investor, it looks like the worst is indeed over for the company.
Sea will report financial results for the third quarter of 2023 on Tuesday, Nov. 14. But back in the second quarter, management spoke about growth again. The company has operations in e-commerce, video games, and financial technology (fintech). And regarding e-commerce specifically, CEO Forrest Li said, "We believe now is the right time to start reaccelerating our investments in growth."
In Q2, active shoppers on Sea's Shopee platform were up. Purchase frequency was also up. This resulted in a 10% year-over-year jump in gross orders.
In Q2, Sea earned net income of $331 million, nearly a $1.3 billion improvement in just one year. Don't expect this level of profitability as it focuses on growing its e-commerce division again. But don't expect steep losses, either. Management is looking for balance.
Investors can expect renewed growth from Sea's e-commerce operations. But growth in video games and fintech could also be on the horizon. For example, the company is taking its most popular game, Free Fire, back to India after being temporarily banned. And India is one of the biggest video game markets in the world.
Moreover, growth for Sea's fintech operation, SeaMoney, never slowed down in the first place. Q2 fintech revenue was up 53% year over year. So investors can reasonably expect this segment to keep performing well too.
What about the competition?
Indonesia is one of the largest economies in the world and a key market for Sea. The stock had dropped because TikTok and other social media companies threatened to take e-commerce market share in that country. But then Sea stock got a boost after Indonesia called for a separation of social media and e-commerce, hurting TikTok.
It seems investors are worried about competition yet again, now that TikTok is looking to get an Indonesian e-commerce license and reenter the market.
There are tons of unknowns in investing. And people are programmed to fear the unknown, including how the competitive landscape will play out for Sea. But investors should remember that not all unknowns are bad. Companies can just as easily surprise in an unexpected way.
I see two possible ways Sea could unexpectedly grow revenue: logistics and advertising. For example, Amazon turned its logistics network into a source of revenue by opening it up to third parties. Similarly, Amazon turned its e-commerce platform into one of the largest and fastest-growing ad platforms in the world, a lever that Latin American e-commerce giant MercadoLibre is also now pulling.
In other words, it's possible that Sea's top line could be hindered by competition, yes. But it's also possible for the company to overcome it with future revenue streams that haven't been explored yet.
The takeaway is this: Sea stock is cheap, the business is healthy, and it could be returning to growth. Investors shouldn't let fear of the unknown rob them of this buying opportunity because there could be good surprises down the line as well.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jon Quast has positions in MercadoLibre. The Motley Fool has positions in and recommends Amazon, MercadoLibre, and Sea Limited. The Motley Fool has a disclosure policy.