- This is a dedicated price action analysis of Sea stock. Our previous PT of $90 was met before selling pressure overwhelmed the buyers in June.
- Therefore, we urge investors to be patient first, as the bull trap in June could send it closer to its May lows.
- Our valuation analysis suggests that SE could underperform at its current levels.
- Given its bearish bias and valuation, we reiterate our Hold rating on SE. We encourage investors to bide their time in adding SE.
Price Action Thesis
We follow up with our post-earnings article on Sea Limited ( SE ) as there were noteworthy developments in SE price action.
We posited a near-term price target ((PT)) of $90 for SE, which was attained in June, as its buying momentum was rejected at a high of $89.92. We reiterated our Hold rating previously as the risk/reward profile was unattractive.
Notably, SE formed another bull trap in June (significant rejection of buying momentum) as it tried to recover its near-term support of $90 (now its near-term resistance). However, the market resoundingly rejected its buying cadence. However, it has managed to stay above its May lows. Accordingly, given its downward bias, the price action signals remain tentative, with a slight bearish tilt.
Our valuation analysis suggests that investors should wait for another re-test of its May bottom to assess the buying support at that level. We posit that SE can likely maintain a market-perform rating close to its May lows if it can execute well. Therefore, we believe there's still tremendous uncertainty over its valuation. As such, we urge investors to undertake a more cautious approach, given its unprofitable operating model and potentially slowing growth.
Consequently, we reiterate our Hold rating as we await a re-test of its near-term support.
SE - Rejected By Another Bull Trap In June
We learned the hard way that investors need to be nimble and not hold the bag when it comes to unprofitable growth stocks. Furthermore, SE formed a double top bull trap (the most potent version of bull traps) in October 2021, dealing it a "mountain face" scenario.
Recently, JPMorgan ( JPM ) Asset Management CEO George Gatch explained his instructions to his team on dealing with such a mountain face. He accentuated (edited):
Speed is safety… a mountaineering adage that I have come to live by. The longer you are on a mountain face, the more likely you will find trouble. But, if you have a bias toward speed— toward action—you reduce your exposure and increase the chances of getting down the mountain safely. I’ve seen this hold true personally and professionally. I always tell my team that I’ll gladly pay for your speeding ticket, but I won’t pay for your parking ticket. Maintain long-term focus, but be agile in the face of new challenges and opportunities. ( George Gatch LinkedIn )
In addition, we noted another bull trap in June at our previous PT of $90, as the market stanched its buying momentum decisively. Therefore, we believe investors should avoid adding anywhere close to its near-term resistance, given its bull trap.
Even though its May lows have held resiliently, we urge investors to be patient. Investors should accord higher precedence to its June bull trap until it has been invalidated decisively. Therefore, from the price action perspective, the right thing to do is to wait patiently for a possible re-test of its near-term support.
SE - Valuation Remains Highly Challenging
Sea Limited revenue change % and adjusted EBITDA margins % consensus estimates (S&P Cap IQ)
Management guided that it targets adjusted EBITDA profitability (including HQ costs) by the end of/exiting FY23. Accordingly, the consensus estimates (generally bullish) have modeled for Sea to post an adjusted EBITDA margin of -4.9% in FY23 before improving to 3.4% in FY24. But these estimates are nothing to cheer about, given its growth premium.
Furthermore, Sea's revenue growth is projected to moderate dramatically through FY24, as seen above, reaching 23.4%. Therefore, we believe Sea is under significant pressure to improve its operating leverage while possibly delivering slowing topline growth.
Therefore, it should not be surprising that Shopee (Sea's e-commerce arm) was reported to have laid off employees in June. Given the increasing pressure to improve operating efficiencies, it's imperative that Shopee gets much leaner to drive underlying profitability.
Sea Limited FCF margins % consensus estimates (S&P Cap IQ)
Moreover, its free cash flow ((FCF)) profitability is also expected to remain supine. The Street's consensus indicates that Sea could achieve an FCF margin of 2.5% in FY24, which is in line with management's target of posting adjusted EBITDA profitability exiting FY23.
But, given its weak FCF margins, we believe it has created immense challenges in parsing its valuations accurately. As a result, we believe the pummeling in SE over the past seven months has been justified.
Stock | SE |
Current market cap | $38.66B |
Hurdle rate ((CAGR)) | 15% |
Projection through | CQ4'26 |
Required FCF yield in CQ4'26 | 4.5% |
Assumed TTM FCF margin in CQ4'26 | 8.5% |
Implied TTM revenue by CQ4'26 | $38.38B |
SE reverse cash flow valuation model. Data source: S&P Cap IQ, author
To understand why the market set up a bull trap in June, we believe a reverse cash flow model could better capture the market dynamics.
We applied a market-perform hurdle rate of 15% in our model, with a corresponding FCF yield of 4.5%. Assuming a blended TTM FCF margin of 8.5% (a discount from the Street's consensus), we derived a TTM revenue target of $38.38B.
Therefore, Sea needs to post a revenue CAGR of 30.3% from FY22-26, which seems unlikely based on the revised consensus estimates.
Consequently, we believe the bull trap in June is appropriate, as SE could underperform the market at its current valuation. As such, investors should be patient to wait for a deeper retracement to at least attain a market-perform hurdle rate.
Is SE Stock A Buy, Sell, Or Hold?
We reiterate our Hold rating on SE.
We urge caution, given the bull trap in June, which rejected further buying momentum resoundingly. Therefore, investors are encouraged to bide their time for a possible re-test of its near-term support.
Our valuation model indicates that SE could struggle to attain a market-perform hurdle rate at the current levels.
For further details see:
Sea Limited: Don't Pull The Buy Trigger Yet (Technical Analysis)