News
Buying This Magnificent Stock For $74 Could Be Like Buying Amazon In 2016
Amazon (NASDAQ: AMZN) was founded in 1994 to sell products over the Internet. Since then, it has become the dominant player in the e-commerce industry. However, the company has also expanded into other areas such as cloud computing, streaming and digital advertising.
Amazon shares have increased more than fivefold since 2016, and while e-commerce remains the company’s biggest source of revenue, its other businesses have played a notable role in that value creation.
Limited Sea (NYSE: SE) is on a similar path to Amazon, albeit at a much earlier stage. E-commerce is the company’s core segment, but it is also seeing success in other areas of the digital economy, such as gaming and financial services.
Sea trades at about $74 per share at the time of this writing (valuing the company at $42.4 billion), but I think it has the potential to quintuple in the coming years. Therefore, investors who missed out on Amazon may want to grab this opportunity with both hands.
A triple threat in the digital economy
Amazon pioneered e-commerce in the US and Europe. Sea is headquartered in Singapore and focuses on serving Southeast Asian markets, which are at an early stage of the digital transition compared to the US. It has a hybrid consumer-to-consumer and business-to-consumer marketplace called Shopee, which is the source of most of its e-commerce revenue.
Like Amazon, Sea is currently focused on optimizing Shopee’s logistics network (SPX Express) through automation and operational improvements to deliver products faster and reduce costs. During the first quarter of 2024, 70% of Shopee orders were delivered within three days and its cost per order fell by 15% across Asia. According to Amazon, faster delivery times encourage consumers to order more frequently because they are more confident in receiving products within a predictable time frame.
Sea’s digital financial services segment is led by SeaMoney and is another key driver of Shopee’s success. Not only does it offer digital bank accounts and consumer loans (including buy now, pay later variety), but also lends money to Shopee merchants to accelerate their growth. At the end of the first quarter, SeaMoney had $3.3 billion in total loans on its books, a 28.7% increase year over year, signaling strong demand.
Sea also owns Garena, a leading game development studio responsible for global hits like Free Fire and Call of Duty: Mobile. It experienced a consistent decline in users after 2021, when pandemic-related lockdowns and social restrictions ended. But the segment stabilized throughout 2023, and in the first quarter of 2024, Garena reported 594.7 million quarterly active users, a 21% year-over-year increase.
The story continues
The strong result was driven by a 24% increase in monthly active users on Free Fire, the most downloaded mobile game in the world in the last quarter.
Image source: Getty Images.
Sea’s growth has accelerated significantly
Sea is coming off a challenging few years. His business lost momentum when global interest rates began to rise in 2022, as consumers suddenly found themselves with less money in their pockets. As a result, the company aggressively cut costs in 2023, putting even more pressure on its revenue growth, which was just 4.9% for the year, a substantial slowdown from the triple-digit growth rates it had previously shown.
But Sea opened 2024 in much better conditions. Its digital entertainment segment remained behind, with revenue declining 15.1% year over year despite rising user numbers. However, its e-commerce business – which accounts for the majority of the company’s total revenue – generated solid growth of 32.9%. Sea’s digital financial services segment also made a positive contribution, with an increase of 21.0%.
Overall, Sea increased total revenue by 22.8% to $3.7 billion. This growth rate was more than four times faster than the 2023 growth rate.
There is an obvious reason for the strong revenue result: Sea increased its marketing spend in the first quarter by an impressive 92.3% year over year. And despite continuing to cut all other costs, this was enough to increase its total operating expenses by 14.8%.
This created a small problem, however. Sea generated net income (profit) of $162.6 million in 2023, a huge improvement over its staggering loss of $1.6 billion in 2022. In other words, its cost cuts had the desired effect. But, by increasing its operating expenses in the first quarter of 2024, its final result fell back into the red, to $23 million.
That’s a small loss on such a large revenue, and Sea has $8.6 billion in cash, cash equivalents and short-term investments on hand, so it can certainly afford it. But it’s something investors should monitor because it would be great to see accelerated revenue growth while maintaining profitability.
Why marine stocks could increase fivefold in the long term
As I mentioned, the Sea is valued at 42.4 billion dollars. Based on the company’s trailing-12-month revenue of $13.7 billion, its shares trade at a price-to-sales (P/S) ratio of 3.1. This value is close to the cheapest level since Sea became a public company in 2017 and is substantially below its peak P/S ratio of 22.9.
This peak valuation was unsustainable, not to mention a little irrational, because it was based on the premise that Sea would continue to grow its revenues at triple-digit rates (as it did from 2019 to 2021) over the long term. However, Sea doesn’t need to grow that quickly for its shares to provide a big return to investors.
If Sea can grow its annual revenue at a compound annual rate of 17.5% over the next 10 years, its revenue will reach about $68.7 billion by 2034. At its current P/S ratio, that would value the company at $199.2 billion, implying a fivefold return from here.
We know that Sea’s revenue growth accelerated to 22.8% in the first quarter, so it is already overperforming. Furthermore, I think there is room for its P/S ratio to increase if this growth continues, providing even more upside potential for the stock. Amazon’s P/S ratio, for example, has doubled since the end of 2022, thanks to the company’s accelerated revenue growth, so there is precedent.
Therefore, investors who missed the opportunity to buy Amazon shares in 2016 – just before they quintupled – may now find a comparable opportunity in Sea.
Should you invest $1,000 in Sea Limited now?
Before purchasing Sea Limited shares, consider the following:
The Motley Fool Stock Advisor analyst team just identified what they believe is the 10 best stocks for investors to buy now… and Sea Limited was not one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia I made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you would have $566,624!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular analyst updates, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns May 13, 2024
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 holds positions on and recommends Amazon and Sea Limited. The Motley Fool has a disclosure policy.
Buying This Magnificent Stock For $74 Could Be Like Buying Amazon In 2016 was originally published by The Motley Fool