SEA Ltd: The Prodigal Son (2Q Deep-Dive)
Positive 6M23 Ecom Contribution + Fortress Balance Sheet + 11% TAM Growth + 12.5x Earnings Multiple. Is Mr Market stupid?
When CEO Forrest Li announced SEA Ltd’s Q2 results in mid-August, he was probably expecting a pat on the back. After all, the team at SEA Ltd had slogged through fire and brimstone over the past year trying to bring the company back to profitability. And to their credit, they had actually successfully done so against all odds, as evidenced by the opening statement of their 23Q2 results:
“In the past couple of quarters, we have not only achieved self-sufficiency, but also demonstrated the profitability of our model and our ability to manage fast and significant shifts in operational focus as we see fit. Given this, we have strengthened our execution capabilities and increased the stickiness of our ecosystem. We believe we are now on firmer footing to better serve our communities.”
“Meanwhile, the economies of our region have remained resilient, and we are excited to see recent ecosystem developments in the growth of diversified user engagement through live streaming, short form videos, and affiliate programs. Such developments offer us further opportunities to grow and expand our long-term profitable addressable market. Given these positive developments and trends, we have started, and will continue, to ramp up our investments in growing the ecommerce business across our markets. We believe that the efficiency gains and stronger footing we have achieved through our past efforts have further strengthened our ability to invest efficiently in growth. As we reaccelerate investments in growth, our strategic focus to build cost leadership and continually improve user experience remains key to our long-term success.” (emphasis mine)
Notice my emphasis above in italics? The CEO’s statements about restarting investments in growth were what caused SEA 0.00%↑’s share price to collapse by nearly -40% overnight — which is where it has pretty much stayed until today.
Ironically enough, a couple of stock commentators who had written about SEA’s latest 2Q results actually had some pretty good things to say about them. And as I’ve actually covered them before in a previous stock report, I had some context to springboard into their latest quarter results. To my utmost surprise, I actually liked what I saw — this article will go into my findings.
Chapters:
Shopee — 40% market share in SEA’s (The Next China’s) E-Commerce
Valuation: 12.5x Earnings Multiple? (50% Margin of safety x2)
Shopee — 40% market share in SEA’s (The Next China’s) E-Commerce
If you’ve read my aforementioned SEA Ltd stock report, you’ll know that I didn’t find its share price particularly undervalued at the time — when it was still trading at $80. At the end of that report, I alluded to potentially considering it undervalued if its share price ever fell to $35 — which according to my estimate implied a normalized PE ratio of ~20x. If it did, that wouldn’t be a bad valuation for what was by far the largest retail e-commerce) operation with 30-50% market share in the relatively high-growth Southeast Asian (SEA) economic bloc — which I’ve described as The Next China — where the regional e-commerce sector sports a TAM growth of 11.5%. 1
In Nov 2022, SEA 0.00%↑ actually fell all the way to just above $40 — but never fell below it. I promptly forgot about it until last week when their share price cratered -40% overnight to $38 or so — where it has continued its precipitous slide to-date.
This was all the more surprising since SEA’s 2Q results were actually in significantly better shape than they were this time last year. At the time, SEA was still bleeding cash from multiple orifices in its business model — with the most egregious being its e-commerce segment Shopee, which at its peak had Sales & Marketing expenses amounting to 70% of e-commerce segment revenues!
As I had already analyzed them before, I immediately knew where their pain points were and thought it was worth a quick 30 minute update — without actually expecting much. Imagine my surprise when I realized that things were actually so much better today! Much of the reasons for their earlier going concern risks have vanished, and as the CEO alluded to their financial results amply demonstrate that they have truly become self-sustainable — we will dive into this below.
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