SEA limited is a hyper-growth stock that has crushed the market since coming public but
like many high growth stocks its share price has been under tremendous selling pressure recently
and is currently down more than 65% from its 52-week high this is a stock that i've admired
from a distance for a long time but is the thesis thrown in this company busted here's
everything you need to know about sea limited my name is Brian Feroldi and my name is Brian Stoffel
thanks to stockcard.io for sponsoring today's video brian despite falling so much SEA limited
is still a $68 billion dollar company and it trades under the ticker symbol SE SEA Limited's
mission statement is to better the lives of consumers and small businesses with technology
that's simple inspirational and optional this is a company that gets mission statements brian i agree
and we're going to focus on that last one which is optional because this company has three different
business segments the first one is guarena that is a gaming platform and the company has an in-house
developed game that is a huge hit called free fire the second business is called shoppi which is an
e-commerce platform similar to amazon ebay and ricotta libre and the third product is c
money which is a fintech payment option similar to mercado pago or paypal now importantly shopy and c
money are primarily focused on southeast asia so countries like taiwan indonesia the philippines
not china now historically all three of these business users have been on fire and remain in
very high growth mode however more recently garena has been struggling now there's a couple reasons
for that one of them is is that as economies and societies open up people are spending less time
playing games we've seen that happen with many gaming companies so it's not a huge surprise
another part of it however is that it has been kicked out of india which is its largest potential
market but not its most important one from a profitability standpoint but i think it's fair
to say that the slowing growth in garena has been a major reason why this stock has been under so
much selling pressure now if we turn our attention to e-commerce we see very few signs of slowing
down the number of orders has almost doubled over the past year and gross merchandise volume or the
value of all the stuff sold on shoppies app and website is up 53 these are very strong indicators
that the company is taking market share primarily in southeast asia now the company's third division
c money continues to show no signs of slowing down quarterly active users recently grew 90 percent
to nearly 46 million and total payment volume continues to skyrocket so when we look at the
company's business model you can see how it's a little bit complicated you have a gaming division
you've got an e-commerce division and you've got a fintech division all rolled up into one now when
we think about customer acquisition cost c limited is still spending very very heavily to acquire
new users across all three of its platforms so its customer acquisition costs are currently very high
now when it comes to gaming e-commerce and fintech those things can be fairly recession proof however
we give this a medium rating because of the pullback and spending on garina and the fact that
once it reaches maturity a recession could hurt the e-commerce division and fintech as well on
the plus side when it comes to gaming marketplace and payments all three of those businesses tend
to benefit from high levels of recurring revenue now let's talk about the malt for a minute the
network effect is very strong here across all three divisions free fire is a multiplayer game
that you can play with your friends so there are some network effects there for shoppi
the more customers that are on the platform the more merchants are incentivized to join
and the more of them that join the more customers that flock to the website it's a reinforcing
loop and the same is true for c money the more merchants that accept c money as a form of payment
the more people that are likely to use it in the future we also think that c limited benefits
from high switching costs there are some switching costs to gaming but the higher switching costs are
really from the combination of the marketplace and the payment platform working together now
when it comes to low cost production the primary way that c limited could have this is by having
a fulfillment network that allows it to send packages at a lower internal cost than the rivals
but the company is currently at the build out stage of those fulfillment centers right now so
we give it a low rating for now we also think that c limited is starting to benefit from branding the
shoppi app is the number one most downloaded app in southeast asia and is rapidly rising the charts
in places like brazil if you put all these things together we both believe that the moat surrounding
all three of these companies is expanding rapidly turning to the company's financials this has been
a top-line growth story and man oh man has the growth been good over the last three years the
company's top line has grown at over a hundred percent per year at the same time gross margins
haven't been what we'd hoped for currently they sit at 39 but that's because right now shoppi and
c money aren't money making ventures now the top line has looked great the bottom line not so much
this company has producing a net loss that has widened over time at the same time free cash flow
has actually been positive if by a small margin and that's a huge benefit because the company
can continue to fund its aggressive investments meanwhile the company's balance sheet is in really
good shape with almost 7 billion in net cash but since net income has been negative and growing
larger returns on capital are currently negative now it's worth diving into the composition of
those sales as this chart shows garena and shoppi are currently the lion's share of revenue with c
money making up just a tiny bit however c money is the fastest growing division it's also really
important to understand this dynamic currently guarina is funding all the future growth that
can come from shopping c money that's because on an adjusted ebitda basis it's the only money maker
that also explains why when the company announced that it was losing some active users for free fire
the stock fell so much turning to management this business was founded by forest lee who is
still the chairman and ceo today if we take a peek at glassdoor we see generally good reviews
from employees but we want to note that there are only a very limited number of reviews available
on the site but we do know that inside ownership at this company is very high with insiders owning
nearly 34 of the company which is worth 21 billion dollars at today's prices so does c limited have
optionality absolutely with the exception of perhaps amazon.com no company has been able to
go into so many industries and execute on their ability to capture market share yeah it's one
thing to launch new businesses it's another thing entirely to scale them as well as this company has
and grow its revenue so rapidly in them meanwhile there's also reason to believe that this company's
net income could improve dramatically once it starts focusing on profitability because right
now operating leverage is working against this business one of the reasons that the company is
willing to spend so much on shopping c money is because the potential market is enormous
no one has actually put a number on it but it's definitely in the hundreds of billions of dollars
and it could even be pushing a trillion another thing that's worth noting is that all three of
those business lines are home grown so the vast majority of this company's revenue is organic
in nature so how's the company done against wall street's expectations well even though
it's down 65 percent from its all-time highs it is still absolutely thumping the market since coming
public as far as meeting wall street's short-term demands the company doesn't focus on that at all
over the last four quarters the company has missed wall street's estimates and unsurprisingly given
where it is in its growth cycle c limited is not returning any cash to shareholders now let's
focus on risks and boy are there a lot to keep in mind first and foremost is competition there is
tons of competition in all of the categories that the company competes including lazada
alipay and many many others dilution is also another thing investors need to keep an eye on
the company had many secondary offerings when the stock was much higher so it could fund its
future growth it's also worth pointing out that this company's financial statements are complex
so this is a medium difficulty business for the average investor to understand and follow because
c limited has operations spread throughout the globe though most are in southeast asia it's
worth noting that there are always going to be inherent geopolitical risks with investing
in the company with the recent decision by the indian government to kick free fire out of the
country as an example of these risks it's also worth knowing that garena is what's funding the
rest of the company right now and video games are a hit driven business free fire is one of
the most popular games in the world right now but will that always be the case that's hard to
tell another thing that we like about the company right now is we're able to get shares for cheaper
than we have in at least two years right now shares trade for around seven times sales which
isn't a great deal but much better than where the stock has been recently so what should investors
watch to tell if the thesis for this stock is on track first keep an eye on garena's gross profit
this is the engine that fuels the rest of the business and we want to see this number remain
stable and continue to grow second keep an eye on shoppee's gross merchandise volume or the value of
all the things sold on the company's marketplace we want to see the number of orders and the gross
merchandise volume continue to grow at at least a 40 rate third keep an eye on c money's total
payment volume this is an indicator that c money is continuing to grow within its user base and
we want to see this business continue to thrive so how did c limited score on our investing checklist
the answer there is great on mine it got an 80 which is particularly impressive given that this
company has not met wall street's estimates and is not currently producing that income and on my
framework this got a score of a 13 which is in the anti-fragile area that's because i believe
that this is a founder-led mission-driven wide moat business that has demonstrated optionality
all right brian we just made our public call so we're going to be giving this the thumbs up in our
stock cards portfolio and i'm going to be adding it to my personal portfolio soon too let's head on
over to stockcard.io we're going to open up our portfolios we're in the anti-fragile portfolio
we're going to place a new order the tucker symbol is s e we're going to do a buy decision
we're recording this on thursday march 24th we're gonna be buying nine shares the stock
is currently at a hundred and twenty dollars and this for you is a score of thirteen then we're
going to head on over to my quality checklist and we're going to be doing the exact same thing
and while brian does that we want to remind folks that you can head on over to stockcard.io
and register with the site and you can view these portfolios for free so you can see how we're doing
at the same time we encourage you to join the beat the brian's contest where you pick
five stocks that you will think will do the best in 2022 beat us and you have bragging
rights finished in first place and you can win a thousand dollar prize there you have it we think
sea laminate is a high quality business that's on sale that's why i'll be buying shares brian's out