Sea Ltd is on My Watchlist. Here’s Why.

I think Sea Ltd (NYSE: SE) is well-positioned for long term growth. Here’s why investors can add it to their watchlists. – China growth stocks

Sea Ltd (NYSE: SE) is a technology company based out of Singapore. The company operates mainly in the Southeast Asia and Taiwan markets.

Its business activities span across three main areas – online gaming, e-commerce, and digital financial services.

Sea Ltd is currently a “hot” stock among investors, evident by its meteoric rise in share price. Its shares are up by almost 500% in the last 12 months.

However, behind the recent rally lie a few positive things about the company that investors should pay attention to.

Solid execution track record

Founded initially as a gaming company, Sea Ltd has evolved into a huge conglomerate with businesses across online gaming, e-commerce, and digital finance.

Many reasons contributed towards Sea Ltd’s success, which includes having a localised strategy for the different markets, strong backing from strategic investors like Tencent Holdings Ltd (SEHK: 700), and a highly effective talent management programme.

Put together, these factors enabled Sea Ltd to become a dominant player in the markets that it operates in, which include Asia-Pacific, Taiwan, and South America.

Sea’s strong performance is evident in its financial performance, too. Revenue grew by 645% between 2015 and 2019.

It continued to deliver solid performance in its most recent quarter amid the Covid-19 pandemic, with adjusted revenue growing by 93.4% year-on-year to US$1.3 billion.

Despite its strong revenue growth, it is worth noting that the company is still unprofitable owing to its high investment to grow its businesses.

Future growth

Despite its historical outperformance, I believe Sea Ltd’s best days lie ahead as it continues to ride on multiple tailwinds, which include GDP growth, an increase in e-commerce penetration, and more.

Garena, Sea Ltd’s gaming company, will continue to grow as it monetises its 500 million quarterly active users (QAUs).

In the quarter ended 30 June 2020, paying users accounted for “only” 10.0% of QAUs – up from 8.4% in the same period last year, with average revenue per user (ARPU) of US$1.40.

Moreover, it could continue to grow its QAUs for the foreseeable future, both from existing markets in the Asia Pacific and South America, as well as newer markets like India.

Similarly, Sea Ltd’s market-leading e-commerce arm, Shopee, will continue to grow – at an even higher growth rate as compared to Garena – as it continues to penetrate its markets in the Asia Pacific, Taiwan, and lately, Brazil.

A combination of higher active users, increasing spending per user, and a higher take rate from merchants would sustain Shopee’s growth for the foreseeable future.

Also, it’s worth mentioning that Sea Ltd has a smaller digital finance arm (Sea Money) which aspires to become the Ant Group in its local markets.

Though relatively small in size as compared to Garena and Shopee, Sea Money can scale up its business quickly by offering digital solutions, such as payments, credit, and others, to Garena and Shopee’s users.

Combined, these businesses should propel Sea Ltd’s growth for the foreseeable future.

Foolish takeaway

In sum, I think investors should keep an eye on Sea Ltd thanks to its solid execution track record and long growth runway.

Still, investors should note that Sea Ltd is trading at a high valuation – of more than 15 times sales – and has yet to report a profit.

On balance, I choose to keep the company on my watchlist and wait for a better entry point.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lawrence Nga doesn’t own shares in any companies mentioned.

The Motley Fool Hong Kong Limited( 2020

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