Aletheia Capital has initiated coverage on Sea with a “sell” recommendation and a target price of US$40 ($56.36).
The brokerage’s target price implies that there’s a 20% downside to the NYSE-listed counter’s last-closed share price of US$50 on Oct 25.
“Sea has chronic difficulties that are not reflected in its elevated valuation,” writes analyst Nirgunan Tiruchelvam in his report dated Oct 26.
The analyst adds that the company is “cash destructive” and “overvalued” in terms of its fundamental metrics. “The cash burn is likely to worsen with its foray into payments and it could be eclipsed by its e-commerce competitors.”
Further to his report, Tiruchelvam lists several downsides to the counter, which includes Sea’s “bloated” e-commerce segment, pointing out that the segment is unlikely to see a positive ebitda till the FY2025.
“The Covid-19 spike in e-commerce revenue and gross merchandise value (GMV) has evaporated,” the analyst writes. “However, Sea Limited has misallocated resources by excessively expanding its e-commerce business in Asean and entering Latin America (LATAM). Operating expenses has tripled between FY2020 and FY2022.”
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In Asean, where Sea is leading in the e-commerce field, the company is facing intense competition from peers such as the GoTo Group, Bukalapak, Blibli and Alibaba-backed Lazada, who are expanding their e-commerce segments in Indonesia, Sea’s largest market. As such, Tiruchelvam expects Sea’s market share in the country to plateau at 40% to 50%. Its take-rate is also estimated at around 9% in FY2022 to FY2024.
Finally, Sea’s ebitda generation is mainly driven by its digital entertainment (gaming) business, Garena, which is contracting due to its excessive concentration on Free Fire, which is responsible for over 25% of Sea’s gaming revenue.
Among the recommendations on Bloomberg for Sea, Aletheia Capital is the only brokerage to give the counter a “sell” call.
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Its revenue forecasts are also below consensus estimates by 15%-24%.
“We are 6%-7% below net income (adjusted),” Tiruchelvam writes. “We differ from the street on the valuation. We have reservations with the street’s view on the valuation.”
For the FY2022, the analyst has estimated Sea’s revenue to come in at US$10.45 billion, with a net loss of US$2.3 billion.
In the FY2023, Sea’s revenue is estimated to come in at US$11.64 billion while still making a loss of US$1.36 billion.
As Sea releases its results for the 3QFY2022 on Nov 16, Tiruchelvam stresses that investors should look out for the company’s revenue and net income and compare it with his below-market forecasts. He adds that investors should also note the company’s quarterly paying users in the digital segment and whether it continues its downward trend in the quarter. In the 2QFY2022, Sea’s quarterly paying users in the digital segment were down 39% y-o-y, he points out.
Finally, Tiruchelvam adds that e-commerce operating losses may continue to exceed his 40%, thereby supporting his view of the company’s “chronic cash burn”.
On Nov 30, where the lock-up period for investors in GoTo ends, Alibaba and Softbank’s Vision Fund may sell their stake in the group.
“A sell-off in GoTo could encourage investors to sell Sea Limited, as the comparative valuation multiples for Asean tech could weaken,” says the analyst.
Shares in Sea closed 62 US cents higher or 1.24% up at US$50.63 on Oct 26.
