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Why Sea Ltd (NYSE: SE) Managed to Beat the Market Today

profileSudhan P

Sea Ltd (NYSE: SE) may not ring a bell to non-investors, but Shopee certainly would.

Shopee is the largest e-commerce platform in Southeast Asia with over 280 million total average visits in 2020. 

Other than Shopee, Sea also operates two other businesses. 

They are Garena, a leading global online games developer and publisher that owns the popular game Free Fire, and SeaMoney, a digital payments and financial services provider.

While the coronavirus pandemic has affected many businesses the world over, Sea has been a beneficiary.

It’s no wonder Sea’s share price (shown by the blue line below) has risen over 200% in the past year alone, compared to the Nasdaq Composite‘s rise of “just” 44%. The Nasdaq is a barometer of how technology stocks perform in the US.

Source: Yahoo! Finance

On Tuesday’s trade in the US market, Sea’s share price rose a further 4% to US$228.00 while the tech index tumbled 0.6%. 

What Led to Sea’s Share Price Rise?

On the whole, the stock market seems to like Sea’s latest earnings report that was released yesterday night, even though the stock opened lower initially. 

For the first quarter ended 31 March 2021 (1Q 2021), Sea’s total revenue surged 146.7% to US$1.76 billion, up from US$714.9 million a year back. 

The growth was largely driven by strong performance in Sea’s e-commerce (EC) business as it continued to roll out tools to better serve users’ needs.

The growth of its digital entertainment (DE) business also boosted the top-line. 

Source: Sea Limited earnings 1Q 2021 presentation

Meanwhile, Sea’s gross profit grew faster than revenue growth, increasing 212.1% year-on-year to US$645.4 million. This led to its gross profit margin improving to 36.6% from 28.9% last year. 

Sea is still loss-making, losing US$422.1 million for the quarter, 50.3% deeper than the loss seen from a year ago. 

However, the percentage of loss compared to revenue is decreasing. This shows the growing scale of Sea’s overall business, even as it continues to invest for growth.

Now, let’s look at how each of the various businesses performed revenue-wise. 

Digital Entertainment Business 

Revenue growth in the digital entertainment business came on the back of a higher active user base as well as the deepened paying user penetration, particularly from Free Fire.

During the quarter, quarterly active users reached 648.8 million, up 61% year-on-year, while quarterly paying users stood at 79.8 million, up 124% year-on-year. 

Source: Sea Limited earnings 1Q 2021 presentation

The strong growth from the latest quarter shows that the company can grow its user base and at the same time, get gamers to spend more on its platform.

Even for gamers who have been playing Free Fire for a long time, the time spent per active user, and the ratio of paying users to active users, are still rising, showing that the game is still engaging for the older cohort. 

According to App Annie, Free Fire is the highest-grossing mobile game in Latin America, Southeast Asia, and India for the latest quarter. 

The game has maintained its leading position for the past seven consecutive quarters in Latin America and Southeast Asia, and two consecutive quarters in India. 

E-Commerce Business

As for the e-commerce business, Shopee, revenue rose 250.4% year-on-year to US$922.3 million.

The huge growth was mainly due to a better scale of its e-commerce marketplace, and an increase in each of its revenue streams, including transaction-based fees, value-added services, and advertising. 

Shopee saw 1.1 billion gross orders, up 153% year-on-year, and gross merchandise value (GMV) of US$12.6 billion, an increase of 103%. GMV shows the value of orders of products and services on Shopee, including shipping and other charges. 

Source: Sea Limited earnings 1Q 2021 presentation

According to App Annie, for 1Q 2021, Shopee continues to rank top across Southeast Asia and Taiwan by average monthly active users and total time spent in-app on Android (Shopping category). 

Digital Financial Services Business

Revenue from Sea’s digital financial services business grew to US$51.3 million from US$10.3 million a year back. 

Sea said that it saw strong growth in the adoption of SeaMoney’s offerings. 

SeaMoney offers e-wallet services, payment processing, credit-related digital financial offerings, and other financial products.

The various services and products are offered under brands like AirPay, ShopeePay, and ShopeePayLater.

SeaMoney’s mobile wallet total payment volume exceeded US$3.4 billion for the first quarter of 2021, more than triple that of the same period last year. 

Quarterly paying users for its mobile wallet services surpassed 26.1 million in the latest quarter. 

What Next for Sea Ltd?

During the earnings call, Forrest Li, Sea’s chairman and group chief executive, commented: 

“To conclude, our first quarter result is a great start to the year. Each of our businesses has performed impressively and is well positioned to benefit from attractive long-term industry potential. Even when offline activity continues to resume, we expect rising digital adoption to be a tailwind for Sea’s sustained growth.”

The digital economy penetration in areas where Sea is operating remains very low, despite the acceleration of digitisation due to COVID-19.

This gives the company huge growth opportunities, which could then lead to market-beating share price returns over the long-term, just like how it has done in the past. 

At Sea’s share price of US$228, it is selling at a price-to-sales ratio of around 25x. 

What Are Your Thoughts on Sea Ltd?

Discuss about Sea Ltd and more with other link-minded investors in our community at Seedly!

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer owns shares in Sea Ltd. 

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About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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