Sea Limited(NYSE: SE) is based in Singapore, and it serves the Southeast Asian market across three business segments: e-commerce, digital entertainment (gaming), and digital financial services.
Its stock is up by a whopping 195% in 2024 so far, thanks to improving economic conditions and the company’s accelerating revenue growth. It’s still down 68% from its all-time high which was set during the tech frenzy in 2021, so I think this recovery is in the very early stages.
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Here’s why Sea Limited stock could double (or more) again in 2025.
E-commerce is Sea Limited’s largest source of revenue. It’s headlined by the company’s hybrid consumer-to-consumer and business-to-consumer Shopee platform, which processed more than 2.8 billion orders during the third quarter of 2024 (ended Sept. 30).
Sea is trying to improve the efficiency of Shopee’s logistics network to save money and offer customers a better shopping experience. It’s having success because, during Q3, the company said half of all orders across Asia were delivered in two days or less while the cost per order continued to come down. E-commerce giant Amazon discovered that customers order more frequently when they receive products quickly, which is good news for Shopee over the long term.
Shopee also has powerful synergies with SeaMoney, which is the main brand in Sea’s digital financial services segment. It provides buy now, pay later loans to consumers on Shopee, and it also lends money to sellers on the platform to help them grow. SeaMoney ended Q3 with a record $4.6 billion in loans outstanding, which was up by a whopping 73% from the year-ago period. It added 4 million first-time borrowers during the quarter, taking its total active users to 24 million.
The third and final segment in Sea’s business is digital entertainment, which is led by the Garena mobile game development studio. It’s home to Free Fire, which continued to be the most downloaded mobile game in the world during Q3 and averaged over 100 million daily active users. Sea’s digital entertainment segment overall served 628.5 million users during the quarter, which was up 15% from the year-ago period.
Unfortunately, gaming has been a drag on Sea’s business since pandemic-era social restrictions ended, because people are now spending less time online. The segment’s quarterly active users peaked at 729 million in 2021, so it hasn’t generated any growth in the three years since then. Monetization has also suffered, with the number of paying users shrinking by 46% from the pandemic-era peak.
The good news is those metrics have stabilized over the past year (despite being down from 2021 levels), so investors will be looking for a return to consistent growth.
Image source: Getty Images.
Sea Limited generated $4.3 billion in revenue during the third quarter of 2024, which was an increase of 30.8% compared to the year-ago period. It was its fastest growth rate in two-and-a-half years, and it also represented the third consecutive quarter of acceleration.
Most of Sea’s Q3 revenue came from the e-commerce segment, where revenue soared 42.6% year over year to $3.2 billion. The digital financial services business also delivered a strong result, with revenue soaring 38% to $615.7 million. Digital entertainment remained a drag on the company’s overall results, with its revenue shrinking 16% to $497.8 million.
Sea’s overall top-line growth was impressive because the company’s operating expenses only increased by 5.7% compared to the year-ago period, and its marketing costs shrank by 4.3%. In other words, Sea wasn’t spending aggressively to generate sales growth; it actually experienced strong organic demand instead.
The rapid revenue growth combined with only a modest increase in costs allowed more money to flow to the bottom line as profit. As a result, Sea generated net income of $153.3 million, which was a positive swing from the $143.9 million net loss it delivered in the same quarter last year.
Sea is carefully balancing revenue growth and profitability in order to build a more sustainable business for the long term. It’s a major shift compared to 2020 and 2021, when the company used a growth-at-all-costs strategy, even if it led to blowout losses on the bottom line.
As I mentioned at the top, Sea stock is down 68% from its all-time high in 2021. Its price-to-sales (P/S) ratio soared above 30 back then, which was undeniably expensive. However, the combination of a falling stock price and solid revenue growth since then have pushed that P/S ratio down to just 4.4 as of this writing.
That’s actually a 53% discount to Sea’s average P/S ratio of 9.5 since the company went public in 2017:
Sea stock will have to more than double from here in order for its P/S ratio to trade in line with that average of 9.5. Investors typically pay higher valuations for companies that are growing quickly, so if Sea’s revenue growth continues to accelerate, I think it could get there in 2025.
Here’s the kicker: Sea has a whopping $9.9 billion in cash and equivalents on its balance sheet with practically no debt. That gives the company incredible flexibility when it comes to ramping up spending in areas like marketing and research and development, which could contribute to a further acceleration in revenue growth. Plus, now that Sea has proven it can be profitable over the last couple of years, it can spend more aggressively without depleting its cash balance.
As a result, there is a clear pathway for this stock to double again next year, so now might be a great time to buy.
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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 has positions in and recommends Amazon and Sea Limited. The Motley Fool has a disclosure policy.
