Sea limited(NYSE:SE) is based in Singapore and serves the Southeast Asian market across three business segments: e-commerce, digital entertainment (gaming) and digital financial services.
The stock price is up a whopping 195% so far in 2024, thanks to improving economic conditions and the company’s accelerating revenue growth. It’s still 68% lower than the all-time high reached during the 2021 tech frenzy, so I think this recovery is still in its very early stages.
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This is why Sea Limited’s stock could double again (or more) in 2025.
E-commerce is Sea Limited’s largest source of revenue. Leading the charge is the company’s hybrid consumer-to-consumer and business-to-consumer Shopee platform, which processed more than 2.8 billion orders in the third quarter of 2024 (ended September 30).
Sea aims to improve the efficiency of Shopee’s logistics network to save money and provide customers with a better shopping experience. It’s succeeding as the company said during the third quarter that half of all orders in Asia were delivered in two days or less, while the cost per order continued to decline. E-commerce giant Amazon found that customers order more often when they receive products quickly, which is good news for Shopee in the long run.
Shopee also has powerful synergies with SeaMoney, the flagship brand in Sea’s digital financial services segment. It offers buy now, pay later loans to consumers on Shopee, and it also lends money to merchants on the platform to help them grow. SeaMoney ended the third quarter with a record $4.6 billion in loans outstanding, up a whopping 73% from the same period a year ago. During the quarter, 4 million new borrowers joined, bringing the total number of active users to 24 million.
The third and final segment of Sea’s business is digital entertainment, which is led by the Garena mobile game development studio. It is home to Free firewhich remained the most downloaded mobile game in the world in the third quarter and averaged more than 100 million daily active users. Sea’s digital entertainment segment served a total of 628.5 million users in the quarter, up 15% from the same period last year.
Unfortunately, gaming has put a damper on Sea’s business since pandemic-era social restrictions ended, as people now spend less time online. The segment’s quarterly active users peaked at 729 million in 2021, so this has no each growth in the following three years. Monetization has also suffered, with the number of paying users down 46% from their pandemic-era peak.
The good news is that these numbers have stabilized over the past year (despite being lower than 2021), so investors will be looking for a return to consistent growth.
Image source: Getty Images.
Sea Limited generated revenue of $4.3 billion in the third quarter of 2024, which was an increase of 30.8% compared to the same period a year ago. It was the fastest growth rate in two and a half years, and it also represented the third consecutive quarter of acceleration.
The majority of Sea’s third-quarter revenue came from its e-commerce segment, where revenue rose 42.6% year over year to $3.2 billion. The digital financial services sector also delivered strong results, with revenue up 38% to $615.7 million. Digital entertainment continued to be a drag on the company’s overall results, with revenue falling 16% to $497.8 million.
Sea’s overall revenue growth was impressive as the company’s operating costs increased by only 5.7% compared to the prior year period, and marketing costs shrank by 4.3%. In other words, Sea wasn’t spending aggressively to generate revenue growth; instead, it experienced strong demand for organic products.
The rapid sales growth, combined with only a modest increase in costs, resulted in more money flowing into the bottom line as profits. As a result, Sea generated net income of $153.3 million, which was a positive change from net income of $143.9 million. loss it was completed in the same quarter last year.
Sea carefully balances revenue growth and profitability to build a more sustainable business for the long term. It’s a big shift compared to 2020 and 2021, when the company adopted a growth-at-any-cost strategy, even if it led to huge losses on the bottom line.
As I mentioned at the top, Sea shares are down 68% from their all-time high in 2021. The price-to-sales ratio (P/S) then rose above 30, which was undeniably expensive. However, the combination of a falling share price and solid revenue growth since then has reduced the price-to-earnings ratio to just 4.4 at the time of writing.
That’s actually a 53% discount to Sea’s average price-to-earnings ratio of 9.5 since the company went public in 2017:
SE PS Ratio data according to YCharts
Marine stocks will need to more than double from now on to bring the price-to-earnings ratio in line with that 9.5 average. Investors typically pay higher valuations for companies that are growing quickly, so if Sea’s revenue growth continues to accelerate, I think this could happen in 2025.
Here’s the kicker: Sea has a whopping $9.9 billion in cash and equivalents on its balance sheet, with virtually no debt. That gives the company incredible flexibility when it comes to increasing spending in areas like marketing and research and development, which could help further accelerate revenue growth. And now that Sea has proven it can be profitable in recent years, it can spend more aggressively without depleting its cash balance.
As a result, there is a clear trajectory for this stock to double again next year, so this could be a good 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 positions in the stocks mentioned. The Motley Fool holds and recommends positions in Amazon and Sea Limited. The Motley Fool has a disclosure policy.
1 Unstoppable 195% Stock Surge in 2024 That Could Double Again in 2025 Originally published by The Motley Fool
