Singapore-based e-commerce and gaming company Sea Limited (SE) has released its third-quarter financial results. While it beat Wall Street’s revenue estimates by 8.4%, the company’s 84 cents loss per share missed the consensus estimate by 37.4%. Wall Street raised the e-commerce company's guidance for fiscal 2021, expecting e-commerce revenue to be between $5 billion and $5.2 billion, respectively, compared to the previous guidance of $4.7 billion to $4.9 billion.

The stock has lost 13% in price over the past month to close yesterday’s trading session at $310.74.

In addition, BofA Analyst downgraded the rating for SE from Buy to Neutral and reduced the earnings estimates for fiscal 2022 and 2023 from a $3.1 and $1.05 loss per share, respectively, to a $5.72 and $4.45 loss per share. Furthermore, SE is selling shares for business expansion and other general corporate purposes, including potential strategic investments and acquisitions, leading to share dilution. So, SE’s near-term prospects look bleak.

Click here to check out our E-commerce Industry Report for 2021

Here is what could influence SE’s performance in the upcoming months:

Top Line Growth Does Not Translate into Bottom Line Improvement

For its fiscal third quarter ended September 30, 2021, SE’s revenue surged 121.8% year-over-year to $2.69 billion. The company’s gross profit increased 147.5% year-over-year to $1.01 billion.

However, its operating loss for the quarter increased 50.1% year-over-year to $458.56 million. In comparison, its net loss came in at $570.98 million, representing a 34.3% year-over-year increase. Also, its $0.84 loss per share increased 21.7% year-over-year.

Lower-than-Industry Profitability

In terms of its trailing-12-month gross profit margin, SE’s 37.58% is 27.3% lower than the 51.66% industry average. Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA are negative compared to the 9.36%, 4.28%, and 3.00% respective industry averages.

Stretched Valuation

In terms of forward P/CF, SE’s 840x is 7,777% higher than the 10.66x industry average. And its forward P/S of 18.41x is 967% higher than the 1.73x industry average. Also,  the stock’s 29.39x and 17.59x respective forward P/B and EV/S are significantly higher than the 2.76x and 2.57x industry averages.

POWR Ratings Reflect Bleak Prospects

SE has an overall D rating, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SE has an F grade for Value, in sync with its higher-than-industry valuation ratios.

The stock has a D grade for Stability, which is consistent with its 1.30 bet. In addition, SE has a D grade for Quality, which is in sync with its lower-than-industry profitability ratios.

SE also has a D grade for Sentiment and a C grade for Growth. This is justified because analysts expect its EPS to remain negative in the current quarter, next quarter, current year, and next year.

Moreover, the stock has a C grade for Momentum, consistent with its 2.5% loss over the past three months.

SE is ranked #70 of 77 stocks in the F-rated Internet industry. Click here to access all of SE’s ratings.

Bottom Line

SE could continue losing in the near term due to concerns over supply chain disruptions and an expected post-pandemic slowdown in the gaming segment. Since it is not likely to turn a profit anytime soon, the stock looks overvalued at the current price level. So, we think it is best avoided now.

Click here to check out our E-commerce Industry Report for 2021

How Does Sea Limited (SE) Stack Up Against its Peers?

While SE has an overall POWR Rating of D, one  might want to consider investing in the following Internet stocks with an A (Strong Buy) or B (Buy) rating: Yelp Inc. (YELP), Travelzoo (TZOO), and Alphabet Inc. (GOOGL).

SE shares were trading at $313.22 per share on Friday afternoon, up $2.48 (+0.80%). Year-to-date, SE has gained 57.36%, versus a 26.67% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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