Tencent-Backed Sea’s 112% Rally Has Reasons to Run

2023-05-12 17:53

Sea Ltd. shares have more than doubled since November, boosting optimism that the tech conglomerate is on the

Sea Ltd. shares have more than doubled since November, boosting optimism that the tech conglomerate is on the path to a sustainable recovery from a devastating slide that started in late 2021.

The bull case for the Tencent Holdings Ltd.-backed firm was bolstered this week when it announced a 5% pay increase for employees, and founder Forrest Li said its cash balance has started growing rather then shrinking, months ahead of target. The Singapore-based company is expected to report a second quarterly profit when it announces results Tuesday.

“Sea could report an earnings beat for the first quarter of the financial year as it continues its strong cost-efficiency execution,” Ong Khang Chuen, an analyst at CGS-CIMB Securities Pte in Singapore, wrote in a note published Monday. “This is likely to be a year of fine-tuning for Sea as it looks to drive sustainable topline growth and profitability.”

Despite their recent doubling, the rally in Sea’s shares still looks like just a tiny blip on a longer-term price chart. The firm’s American depositary receipts had surged to a record $366.99 in October 2021 before a bursting of the pandemic-era tech bubble saw them crash to just $40.92 in November. They closed at $86.71 Thursday, extending gains from last year’s low to 112%.

Sea — whose businesses span e-commerce website Shopee, internet services firm SeaMoney and gaming division Garena — will report first-quarter net income of $223 million next week, versus a loss of $580 million in the same period a year ago, according to the average estimate in a Bloomberg survey. The firm reported its first-ever quarterly net profit in March, about 14 years after its founding.

Total Overhaul

The improving numbers are the result of an overhaul made last year, which included cutting thousands of jobs, exiting markets such as India, and trimming more than $700 million from quarterly sales and marketing expenses.

“We see broad stability in top-line metrics and continued focus on profitability, with market share positioning largely intact,” Sanford C. Bernstein & Co. analysts including Venugopal Garre in Singapore and Ankit Agrawal in Mumbai wrote in a note Monday. “A return of growth, which may still take more time to pan out, will be the next important catalyst,” they said, reiterating their outperform rating.

Analysts are generally positive, with 30 having a buy rating, 11 recommending a hold and just one telling clients to sell, data compiled by Bloomberg show. The average 12-month price target is $96.48, about 11% higher than the latest close.

One part of Sea’s businesses that analysts remain wary of is the gaming unit, which is seen dragging down first-quarter earnings.

There will be further moderation in the gaming business as the current title “Free Fire” matures and no new games have been released, the Bernstein analysts wrote. “Game segment data suggests that the year-on-year decline will continue,” they said.

Read more: Sea Raises Pay 5% in Sign of Tech’s Recovery From Epic Crash

Longer-term, most analysts are positive the broader upward momentum will be sustained.

“Sea’s rapid improvement in cost structure should enable it to net a profit for full-year 2023, while it might take rivals such as Grab and GoTo another one or two years to achieve the same,” Bloomberg Intelligence analyst Nathan Naidu in Hong Kong wrote this month in a note.

“Sea’s e-commerce expansion in Latin America could kick sales growth back into high gear after a deliberate slowdown to achieve breakeven, which should happen this year,” he said.

Tech Chart of the Day

While the Nasdaq 100 Index has surged 22% this year, boosted by strong rallies at technology giants Apple Inc. and Microsoft Corp., the Russell 2000 Index has fallen nearly 1% in the same period. US small caps have largely underperformed tech stocks in 2023, as the effects of the banking crisis linger.