2023-08-16 09:00:00 ET
Summary
- Sea Limited investors endured a torrid 'historic plunge,' as SE fell nearly 29% yesterday, wiping out a quarter of CEO Forrest Li's wealth.
- While the earnings report didn't seem that bad, investors were concerned about the company's renewed focus on taking on TikTok.
- As such, Sea Limited's push toward sustainability profitability could be extended, which wasn't denied by management when analysts pressed for clarity in the earnings call.
- However, I also assessed that yesterday's steep selloff took us back to November 2022 support levels. SE could bottom out from here with selling exhaustion.
- I make the case for why I decided to buy aggressively at yesterday's session lows. If you have been waiting to buy more, make full use of the steep selloff.
Bloomberg called it a " historic tumble ," as Sea Limited (SE) investors saw its stock close nearly 29% below its previous day's session. It also reportedly wiped out a quarter of CEO Forrest Li's wealth. Weak holders who didn't anticipate such massive volatility likely fled, as the Singapore-headquartered internet company telegraphed more investments in e-commerce should be expected.
As such, a delayed push toward e-commerce profitability is likely in the works, as investors who fled feared the loss-driven gross merchandise value or GMV growth that characterized SE's previous rapid ascent and descent.
However, since SE's massive battering that formed its November 2022 bottom, the company has strategically adjusted its e-commerce growth. With growth in Southeast Asia slowing and hobbled by a possible recession, Sea Limited switched gears as the company underscored its commitment to profitability.
However, in yesterday's second-quarter or FQ2 earnings release , management's commentary reignited worries about when investors can expect Sea Limited to post sustainable profitability. Analysts on the call were palpably surprised by the renewed focus to invest more aggressively in its e-commerce business. Management also didn't reject suggestions that its near-term profitability could be impacted as investors assess the possible extent of further losses.
I discussed the impact of TikTok (BDNCE) in my pre-earnings update , suggesting investors must assess the increasing competitive threat posed by the ByteDance-owned unit. Management's commentary in the earnings call was aimed at TikTok, as Sea Limited channels its investments to live-streaming and content-based e-commerce. Investors should also anticipate more significant shipping subsidies as Shopee (Sea Limited's e-commerce unit) reaccelerates its investments push.
I highlighted in my previous update that Sea Limited is expected to be on track for potentially significant operating leverage gains. Yesterday's selloff suggests the market has likely priced in a substantial downward de-rating in its profitability push. While Sea Limited bears could point out that the company's aggressive subsidies-induced growth is unsustainable, I believe management has proved that they could pivot their strategies expeditiously.
Coupled with more robust and potentially bottoming performance from Garena (Sea Limited's gaming arm) as it posted constructive growth metrics, Sea Limited is reinvesting from a position of strength.
I assessed that the company likely viewed TikTok's competitive challenge as formidable and needs to be addressed. Despite that, Shopee remains the market leader in Indonesia and the Southeast Asia region. Notwithstanding the leadership, management emphasized that long-term leadership remains predicated on Shopee's ability to consolidate its position as a low-cost leader.
Group Chief Corporate Officer Yanjun Wang accentuated that "in the long term, competition in e-commerce is fundamentally based on serving users efficiently and at low cost." As such, Shopee must focus on improving its cost efficiencies on its path toward profitability.
Sea Limited's ability to achieve adjusted EBITDA gains in e-commerce and Sea Money (fintech unit) indicates the presence and benefits of its growing scale. Hence, while TikTok is a formidable threat, Sea Limited's e-commerce and flywheel should position it well to take the near-term profitability hit as it looks to expand its market leadership to squeeze TikTok. Moreover, its cash and liquidity position has improved to $7.7B in Q2, suggesting the company is not expected to face imminent liquidity crunches.
I believe analysts will likely mark down Sea Limited's adjusted EBITDA estimates over the next three years, given the company's strategic adjustments. While I'm disappointed that it would likely lead to an extension before reaching sustainable profitability, I'm also assured that yesterday's "historic selloff" likely led to a massive capitulation which could help SE bottom out against its November 2022 support zone.
SE price chart (weekly) (TradingView)
Considering SE's 2-Day chart above, it's clear that market operators de-rated SE in anticipation of an extended profitability push. However, the price action signals strongly suggest that the selloff indicates a capitulation event re-testing its November 2022 lows.
With that low taken out, I expect dip buyers looking for selling exhaustion to return. While still early, I've already used its plunge yesterday to add more positions near the session's lows.
More conservative investors should consider waiting for a validated bullish reversal before picking their spots. However, with yesterday's selldown and Sea Limited's increasing scale, SE remains a Buy, offering investors another opportunity to add in line with last year's lows.
Rating: Maintain Speculative Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating. See the additional disclosure section below for important notes accompanying the Speculative Buy rating presented.
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Sea Limited: Doubling Down Opportunity From 'Historic Plunge'