Sea Ltd. Sees Growth in Video Gaming

12/11/2019 5:00 am EST

Focus: CONSUMER

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Sea Limited (SE) isn’t known to most investors, but it’s been a leading glamour name for much of this year and, after a bullish reaction to Q3 earnings, looks ready to resume its advance, observes Mike Cintolo, editor of Cabot Growth Investor.

Sea is one of a couple of new-age e-commerce outfits in southeast Asia, making its hay in Indonesia, Taiwan, Vietnam, Thailand, the Philippines, Malaysia and Singapore. The firm has both the largest digital entertainment platform and the largest e-commerce operation in the region.

On the digital entertainment side, Sea operates the most popular online game platform (dubbed Garena) that includes some hit offerings (its Free Fire game is one of the biggest revenue producing games in the world) as well as leading e-sports functions (where people watch others play competitive video games, believe it or not), and growth has been rapid (up 212% in Q3, though that’s expected to slow in 2020).

On the e-commerce side, which has even more long-term potential, the firm’s Shopee brand is a hit (fifth most downloaded shopping app worldwide!), with sales up a mind-boggling 261% in Q3 thanks to booming transaction-based fees (gross merchandise volume up 70% from a year ago; items ordered up 103%) and advertising revenue.

Given that e-commerce in Sea’s core markets is expected to quadruple over the next few years, many investors are starting to think this company is an emerging blue chip in the e-commerce field.

Earnings remain deep in the red, but the writing is on the wall here, with Sea having a clear path to becoming many times the size it is today. As for the stock, it staged a powerful breakout in February and enjoyed a great five-month run before base-building for three months.

The recent earnings reaction was fantastic, and now the stock has calmed down near its highs despite a big ($1 billion) dilutive convertible offering last month. We like the look of it and a strong breakout would likely be buyable.

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