Buying This Magnificent Stock at $35 Could be Like Buying Amazon in 2013
Amazon (NASDAQ: AMZN) is one of the most diverse technology organizations in the world. It started out as an e-commerce company in 1994, and it dominates that industry today. But it has since expanded into other businesses like cloud computing, streaming, and digital advertising.
E-commerce remains Amazon's largest source of revenue, but the company's diverse exposure to so many different industries has driven remarkable gains for investors. In fact, Amazon stock has soared tenfold since 2013 alone.
But there's another technology stock with the potential for tenfold gains in the future. Like Amazon, Sea Limited's (NYSE: SE) core business is e-commerce, but it also has a large digital entertainment (gaming) segment, and a growing digital financial services platform.
Sea Limited is valued at just $21.8 billion today, so even with a tenfold increase in its stock price, it would still be worth a fraction of Amazon's $1.5 trillion market capitalization. Here's why investors might want to load up on the stock today.
A triple threat in the digital economy
The average person spends about 6 hours and 41 minutes online each day. Assuming they sleep for eight hours, that means they are in front of screens for almost 30% of their waking hours. Understandably, companies like Sea Limited want to meet people where they enjoy spending their time, so they are investing heavily in digital services.
Sea Limited's largest source of revenue is the Shopee hybrid consumer-to-consumer and business-to-consumer e-commerce marketplace. Since the company is based in Singapore, Shopee has a strong presence in Asian nations like Indonesia, Malaysia, Vietnam, and Taiwan (among others). In fact, it has received over 342 million monthly visits throughout 2023 according to Statista, making it the most frequented online marketplace in Southeast Asia.
Sea Limited's second-largest source of revenue is digital entertainment, which is driven predominantly by its Garena game development studio. It's responsible for blockbuster mobile titles like Free Fire (which has been downloaded over 1 billion times), and Call of Duty: Mobile. Garena serves 544 million users each quarter, but that's down from a peak of 729 million during the pandemic in 2021. Free Fire also lost around 40 million monthly users to a ban in India due to privacy concerns in 2022, though it is being reintroduced as we speak.
The drop in users has been a drag on Sea Limited's overall revenue, as it means fewer gamers are spending money on Garena's titles. But I'll touch on the financial hit later.
Finally, Sea Money is the driving force behind Sea Limited's digital financial services segment. It serves customers as a banking and payments platform, and it also offers financing. It provides people with cash loans and a buy now, pay later service, and it even finances merchants on Shopee to help them grow. The digital financial services segment only contributes 13% of Sea Limited's total revenue right now, so it's still quite small.
Sea Limited's revenue growth is moderating, but that's by design
When Sea Limited stock came public in 2017, management was heavily focused on driving customer acquisition and sales growth. That strategy continued until 2022, when the broader economic climate was hit by soaring inflation and interest rates. Consumers around the world have been tightening their belts ever since, so Sea Limited had to adjust its priorities.
Now, the company is focusing on generating profits by spending significantly less money, which has come at the expense of revenue growth. In fact, with 2023 winding down, Wall Street expects Sea Limited's revenue to come in at $12.9 billion for the full year, representing just 4% growth compared to 2022. Here's how that stacks up to prior years:
Year | Revenue (Billions) | Growth (YoY) |
|---|---|---|
2017 | $0.55 | 58% |
2018 | $1.05 | 89% |
2019 | $2.9 | 178% |
2020 | $4.4 | 101% |
2021 | $10.0 | 127% |
2021 | $12.4 | 25% |
2023 (Estimate) | $12.9 | 4% |
Data source: Sea Limited. YoY = Year over Year.
Sea Limited's revenue grew at a compound annual rate of 86% between 2017 and 2022, so the projected 2023 result is incredibly sluggish. Gaming has been the main drag, with revenue in the digital entertainment segment sinking 43% through the first nine months of 2023. E-commerce, on the other hand, remained strong with growth of 33%.
But there's another reason for the recent weakness in Sea Limited's overall results. The company slashed its operating costs by 24% in the first nine months of this year, with sales and marketing expenses (its largest cost) down 35%. It's difficult to attract new customers and create opportunities to generate revenue when Sea Limited pares its spending so heavily.
But here's the big positive. Through the first nine months of 2023, those moves resulted in a net income (profit) of $274 million, which is a huge swing from the $2.1 billion net loss in the same period of 2022.
Why Sea Limited stock is capable of a tenfold gain over the long term
As I mentioned, Sea Limited is valued at $21.8 billion as of this writing. But the company has $6 billion in cash and short-term investments on its balance sheet with almost no debt. After stripping that out, investors are valuing its actual business at closer to $16 billion.
That's important because -- as I talked about earlier -- Sea Limited's revenue is projected to come in at $12.9 billion for 2023. That places its stock at a price-to-sales (P/S) ratio of just 1.7, or 1.2 after stripping out cash!
Sea Limited stock was trading at a P/S ratio of 20 just two years ago. That was extremely rich, and I don't expect it will return to that lofty level. But even Amazon stock trades at a P/S ratio of 2.8 right now, which makes Sea Limited appear incredibly undervalued.
It's very unlikely that Sea Limited's revenue will return to a compound annual increase of 86%. But improving economic conditions in the future could allow the company to ramp up its spending on line items like marketing once again, to fuel growth. With that said, even if revenue growth averaged a more modest 20% on average, it could still top $79.8 billion annually in a decade's time.
If investors attribute a P/S ratio of 2.8 to Sea Limited stock (to match Amazon), that will place the company at a valuation of $223 billion -- 10 times where it trades today.
Therefore, if you missed the massive run in Amazon stock since 2013, buying Sea Limited stock at the current price of $35 might give you another chance at a tenfold return.
Should you invest $1,000 in Sea Limited right now?
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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. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Sea Limited. The Motley Fool has a disclosure policy.
Buying This Magnificent Stock at $35 Could be Like Buying Amazon in 2013 was originally published by The Motley Fool
