Also known as the Amazon of Asia, Sea Limited stock had an amazing year, with its share price quintupling since April of 2020. Sometimes compared with Chinese Tech giant Tencent, Sea Limited started in the business of video games, with the great hit Free Fire, which was entirely produced in-house and has been extremely successful in many South Asian countries, such as the Philippines, Malaysia, Indonesia, Singapore, and Vietnam.
The company also developed its own e-commerce platform, called Shopee, with a potentially massive market to grow into, given the favorable demographic trends of the region (growing population and rising income levels). On top of this, the company has also launched its own payment app, SeaMoney, which has also seen massive growth in recent years.
All of these three business lines (Gaming, E-commerce, and online payments) have been favorably impacted by the Coronavirus crisis, which has forced an acceleration in digitalization in South Asian economies. The stock price has been on a roll, with investors plowing a lot of money into the company and buying into the growth story of Sea Limited. Pros and Cons
While the company is undoubtedly investing into the “right” segments of the economy, that is the ones that are positioned to grow massively in the future given more tech-savvy generations reaching the working age, the hype might have gone too far, as shown by the massive increase in stock price. Investors are right now paying mostly for earnings that have yet to materialize, given that the company is currently running at a loss and reinvesting most of its revenues in the business to further push growth.
A recent study from Google on the South Asian digital economy found that the segment will more than triple in size in the next 5 to 10 years, going from $100B to north of $300B in annual volumes. As mentioned before, the pandemic has accelerated this trend and is “pulling forward” some of these projected revenues to the present. This is good news for companies like Sea Limited but it also risks promoting speculative activity on the side of investors, which are now bidding up anything related to the “digitalization” theme on global stock markets. In this sense, the rise of Sea Limited closely resembles what is happening in the Nasdaq to peers like Etsy, Amazon, and video game producers, which stocks are in some cases reaching dangerously high prices which are difficult to justify by looking at fundamentals.
It is also important to remember that the stock price does not define the quality of a company. A company can have an extremely high stock price and be in a “bubble” and still be a very successful business destined to prosper in the future. The problem lies in determining what really consists of a fair value for a company like Sea Limited today, and the question is an extremely hard one given that the company has yet to turn a profit.
Final thoughts
Therefore, investors should be wary of making investment decisions based on the hype of the moment and must be aware of the fact that a company is not a “buy” by default if the business is successful but the shares are overbought. This said, Sea Limited is a very successful business and seems to be tapping into a massive growth market. The development of the pandemic could have a strong effect on the stock and it is likely the share price will experience considerable volatility going forward, depending on the efficacy of the vaccine and on the ever-changing regulatory environment of South-East Asian countries.
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