Sea Limited’s (NYSE: SE) Valuation is Lower than it was in 2019, but Forecasts Vary Widely

Last week, Sea Limited ( NYSE: SE ) announced that the company would be closing its e-commerce business in India. The share price initially came under pressure, but has since recovered some ground. Sea’s stock price rose more than 800% between the end of 2019 and October last year, but has since given up 85% of those gains.

The decline in Sea’s share price has been disappointing for shareholders. However, with the share price 70% below its highs, there may be another opportunity, if, or when, sentiment improves.

The Bad News

The announcement from Shopee is the latest in a long list of negative news reports:

• Growth stocks, and particularly those of unprofitable companies like Sea have been out of favor with investors for most of the last year. 

• In January, Tencent announced that it had reduced its holding in Sea , amidst China’s crackdown on tech companies.

• In February, the Indian Government banned 54 Apps including Garena’s popular Free Fire game.

• In early March, Sea disappointed investors when it reported a slightly wider than expected net loss and issued cautious guidance.

• Later in March Sea announced that Shopee would be closing its operations in France. The business was seen as a pilot program ahead of a wider expansion into Europe.

• Last week Shopee announced that it would be closing its India operations just months after opening the business .

With all this news, it really isn't surprising to see the share price under so much pressure. But bad news can also create great opportunities for long term investors.

Sea’s main assets are Shopee, an ecommerce business, and Garena, an online game developer and publisher. The ecommerce business contributes slightly more revenue but has negative margins, while the gaming business is cash flow positive. It appears that the company is trying to improve margins by cutting back on the new ecommerce ventures.

The Good News

When we calculate an estimate of Sea Ltd’s intrinsic value, we arrive at a price per share of $246. This implies that at a price of $124, the share is trading at a 49% discount.

There are some important caveats to this estimate. The calculation is based on average analyst earnings forecasts, so it’s only as good as those forecasts. Furthermore, analysts have been steadily lowering their forecasts since May last year. In fact when we estimated the intrinsic value in August last year , we came to a price of $300, so the value has fallen quite a bit already. If forecasts continue to fall, the fair value estimate will fall too.

The chart below indicates that there's a wide range between the highest and lowest EPS forecasts.  There are 19 analysts with EPS forecasts for the year to December 2023, and the difference between the highest and lowest is more than $7! This indicates a high level of uncertainty about the future.

Price ratios are a somewhat flawed method of valuing stocks, but they are useful when comparing the valuation of similar stocks. They can also be used to compare a stock’s current valuation to its valuation in the past. Sea doesn’t have positive earnings so we can’t calculate a P/E (price to earnings) ratio, but we can calculate its P/S (price to sales) ratio, which is now 6.6x. During the first quarter of 2020,  the price to sales ratio hovered between 8x and 10.4x - so based on this metric it is now cheaper than it was before the share rallied 800%.

The net income margin has also improved from -41% during the first quarter of 2020 to -21% in the last quarter. in other words, Sea is trading on a lower P/S ratio and its net loss as a percentage of revenue has halved. Based on this information alone, the share looks like a much better prospect than it did in early 2020 - but clearly expectations have changed a lot too.

What does this mean for Investors?

Bad news creates some of the best opportunities for investors. There’s now a lot of bad news in Sea’s share price which is now trading at a modest discount to our estimate of fair value - assuming the outlook doesn't deteriorate further. On the positive side, margins have improved, and it appears that Sea is making an effort to improve them further which may make it more attractive to investors.

If the bad news is out of the way, Sea may be offering an investment opportunity. But this will only be the case if you believe the company can perform in line or better than the median EPS growth forecast of 26%. However, if you believe Sea will struggle to deliver that level of growth the uncertainty may be too high to justify the risk. For further details about the company have a look at our Sea Ltd Analysis page .

If you would like to consider other online retailers with better growth forecasts, you may want to take a look at this list of Bedroom Shoppers companies. You can also use the Stock Screener to find gaming stocks by filtering for stocks in the ‘ Interactive Home Entertainment ’ industry.

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Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.