Up More Than 25% YTD, Will Sea Ltd. Continue To Rally?

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Headquartered in Singapore, Sea Limited (SE) is engaged in digital entertainment, e-commerce, and digital financial service businesses in Asia, Latin America, and internationally. It operates through its Garena gaming platform, Shopee e-commerce platform, and SeaMoney, a digital financial services platform. SE’s shares have advanced 29% year-to-date, primarily because of a substantial surge in e-commerce revenue and its expanding global footprint.

However, its sky-high valuation and low profit might be a cause of worry for investors. Furthermore, concerns about SE’s staggering losses in the face of a potential slowdown of its gaming division with the reopening of economies could bring downward pressure on the stock. Although the company is witnessing solid revenue growth, its business model is unstable and its losses are steep. Here is what we think could influence SE’s performance in the near-term.

Slowdown in Gaming Business

While SE’s e-commerce segment generates most of the company’s revenue, its gaming division’s growth has been showing signs of slowing down. In 2020, it generated significant revenue and profit from Garena, its digital entertainment division, as it was fueled by the hot demand for gaming.

The COVID-19 pandemic drove hordes of new gamers to its gaming platform. But with an economic recovery gathering steam, its platform’s active user growth may cool down in the coming months. The company expects its digital entertainment bookings to increase 38.1% in 2021, representing a substantial slowdown from its 80% bookings growth in 2020.

With more people now embracing outdoor activities again as a result of large-scale vaccination drives, the demand for gaming could slowdown. As such, continuing to engage its paid users and increase its active users could be challenging for SE in the near-term.

Disappointing Financials and Low Profitability

SE’s total operating expenses increased 80% year-over-year to $891.04 million in the fourth quarter, ended Dec. 31, 2020. The company’s operating loss increased 55.3% from its year-ago value to $357.32 million. Its net loss rose 86.1% year-over-year to $524.57 million over this period.

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