In the volatile world of stocks, Sea Ltd (SE, Financial) recently experienced a daily loss of 6.78%, yet it boasts a significant three-month gain of 59.88%. With an Earnings Per Share (EPS) of 0.05, investors might wonder if Sea is currently undervalued. This article delves into the intrinsic valuation of Sea, leveraging the GF Value to determine if the current market price reflects its true worth.
Company Overview
Sea operates Southeast Asia's largest e-commerce platform, Shopee, measured by gross merchandise value and transaction volume. Originally a gaming company known as Garena, Sea expanded into e-commerce in 2015, which has since become its growth engine. Shopee operates a hybrid C2C and B2C model across eight key markets, with Indonesia making up 35% of its GMV. The gaming segment, led by the popular game Free Fire, contributed to 74% of Sea's gaming revenue in 2021. Additionally, Sea's financial services arm, SeaMoney, focuses predominantly on credit lending.
Understanding GF Value
The GF Value is a proprietary measure calculated to represent the fair value of a stock. This calculation is based on historical trading multiples, a GuruFocus adjustment factor from past returns and growth, and future business performance estimates. When the stock price significantly deviates from the GF Value line, it suggests potential overvaluation or undervaluation, influencing future returns.
Currently, Sea's stock price stands at $67.1, against a GF Value of $76.99, indicating that the stock is modestly undervalued. This suggests a potential for higher future returns relative to its business growth, assuming the market corrects the price discrepancy.
Financial Strength and Stability
Investing in companies with robust financial health is crucial to mitigate the risk of capital loss. Sea's cash-to-debt ratio of 1.3, which is better than 69.8% of its peers in the Retail - Cyclical industry, reflects a fair balance sheet. This financial stability is essential for sustaining operations and funding future growth.
Profitability and Growth Prospects
While Sea has demonstrated profitability, its operating margin of 1.24% is lower than many competitors. Despite this, the company's significant revenue growth rate of 33.8% over the past three years outpaces 90.79% of its industry counterparts. This growth, however, must be viewed in light of the company's overall profitability metrics and future market conditions.
Investment Efficiency: ROIC vs WACC
Comparing Sea's Return on Invested Capital (ROIC) of 0.38 to its Weighted Average Cost of Capital (WACC) of 12.71 reveals challenges in generating adequate returns on investments. This metric is crucial as it indicates how effectively a company is at turning capital into profits.
Final Thoughts
Sea Ltd (SE, Financial) appears modestly undervalued based on its current market price and GF Value, suggesting potential for investment gains. However, investors should consider both financial health and profitability metrics in their decision-making process. For a deeper analysis, explore Sea's 30-Year Financials here.
To discover other high-quality companies that may offer above-average returns, check out the GuruFocus High Quality Low Capex Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
