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Sea Ltd has found its level, upgrade to Hold

  • Sea has lost c75% of its value in the past six months

  • The market has punished Sea for its extravagant valuation, poor cashflow, and reliance on gaming

  • The negativity is now in the price. We upgrade to Hold from Sell and maintain our target price

Sea Ltd has found its level, upgrade to Hold
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

Tellimer Research
10 May 2022
Published byTellimer Research

We raise our recommendation to Hold and maintain our key assumptions, with an unchanged SOTP-derived target price of US$72.

Sea Ltd has lost three-quarters of its value in the past six months. It has underperformed the Nasdaq by 50% and the Kraneshares emerging markets technology index by 30%.

Performance comparison

The stock is now fairly valued in accordance with our target price.

Sea Ltd: SOTP

We think the market is now pricing in Sea Ltd frailties, which are as follows:

  1. The Fed’s 0.5% rise in interest rates has increased the aversion to growth stocks. As a highly valued but loss-making company, Sea Ltd has been a sitting duck.

  2. Sea Ltd's gaming business is likely to generate weaker operating performance. The digital entertainment (gaming) segment disappointed in Q4 21 and we are pessimistic about the segment's prospects going forward. The gaming segment is excessively dependent on a single game, Free Fire, which has been banned in India and is losing traction in the rest of the region.

  3. We expect that the average GMV per order for Sea Ltd will fall in FY 22 by 10%.

We maintain our assumptions for our SOTP-derived valuation. Investors should watch out for 1Q22 results on 17 May.