Sea Limited: More Pain Ahead Before ReversingSea Limited is slated to release its Q1 earnings card on May 17. Investors eagerly anticipate a reassuring card, given SE stock's massive 85% drop from its highs.
We believe the market has been pricing in regional headwinds in Southeast Asia. The region has also been hampered by growth, inflation, and recession fears.
Sea Limited's revenue and EPS estimates have also been downgraded markedly. As a result, its path to profitability could be impacted by weaker discretionary spending.
We revise our rating from Buy to Hold. We urge investors to first watch for a strong consolidation before adding more exposure.
Investment Thesis
Sea Limited (NYSE:SE) is scheduled to report its FQ1'22 earnings card on May 17. Its stock has collapsed dramatically over the six months, to the dismay of its investors. After a massive run-up over the past two years, SE stock was hammered, falling almost 85% from its highs in October.
Despite providing more clarity on its underlying metrics, with guidance on a path to profitability in its FQ4 card, the market was not convinced. Instead, investors have battered e-commerce and gaming/entertainment stocks as the reopening themes gained momentum. Given Sea's significant exposure to these two segments, we could hardly fault early investors for bailing out of SE stock in droves as they sought to lock in gains.
Our price action analysis also indicated a series of traps over the past few months. Furthermore, sellers have recently overwhelmed SE stock, breaking below a critical support level, pointing to potentially more downside ahead.
While we remain long-term investors in SE stock, we believe it's prudent not to catch the falling knives from here. Given Sea Limited's unprofitability, investors need to recognize why the market has brutally digested its growth premium. The macro headwinds that have impacted the US economy have headed to Southeast Asia. The global inflationary pressures have also percolated into their economies. Such forces could significantly impact consumer discretionary spending, hampering Sea Limited's ability to continue growing rapidly.
As a result, we believe the time has come to revise our rating on SE stock from Buy to Hold. We urge investors to let the stock consolidate and find a robust consolidation level first (which we have not observed any).
- S.A.
