Sea (SE)’s Falls -6.4%. Is It Fairly Valued?

Sea was one of the market's biggest losers today, losing 6.4% of its value and underperforming both the S&P500 and Dow Industrial composite indices by 1.0%. The large-cap Consumer Discretionary company ended the day at $61.69, but is still well above its 52 week low of $40.66 and is 34.66% below its average target price of $94.42. Over the last 12 months, Sea is down -27.0%, and has underperformed the S&P 500 by 37.0%. The stock has an average analyst rating of buy.

Sea does not release its trailing 12 month price to earnings (P/E) ratio because its earnings per share of $-1.76 are negative over the last year. Since P/E ratios are the stock's price divided by its earnings per share, a negative EPS number will result in a negative P/E ratio. This doesn't tell us much besides the fact that the company is not currently profitable.

Based on Sea's positive earnings guidance of $2.37, its stock has a forward P/E ratio of 26.0. Earnings refer to the net income of the company from its sales operations, and the P/E ratio tells us how much investors are willing to pay for each dollar of these earnings. In comparison, the Consumer Discretionary sector has historically had an average P/E ratio of 22.33.

Another metric for valuing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present value of the company if it sold all its tangible assets and paid off all debts today. Sea's P/B ratio of 5.71 indicates that the market may be overvaluing the company when compared to the average P/B ratio of the Consumer Discretionary sector, which is 3.12.

Sea is likely to attract many investors on the basis of its strong gross margins, which indicate that it either has an exceptional competitive advantage, or that its particular product or services involve very few direct costs:

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2022-04-22 9,955,190 -6,059,455 39.13 26.92
2021-04-16 4,375,664 -3,026,759 30.83 10.86
2020-04-14 2,175,378 -1,570,458 27.81 -9.8
2019-03-01 4,375,664 -3,026,759 30.83 n/a
  • Average gross margins: 32.2 %
  • Average gross margins growth rate: 6.1 %
  • Coefficient of variability (lower numbers indicate more stability): 15.1 %

Don't let the above fool you. Such high gross margins need to be considered alongside the company's operating margins, which take into account overhead:

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2022-04-22 9,955,190 -5,478,795 -15.9 46.63
2021-04-16 4,375,664 -2,652,230 -29.79 27.29
2020-04-14 2,175,378 -1,496,152 -40.97 -37.53
2019-03-01 4,375,664 -2,652,230 -29.79 n/a
  • Average operating margins: -29.1 %
  • Average operating margins growth rate: 14.5 %
  • Coefficient of variability (lower numbers indicate more stability): 35.3 %

We can see that in fact, Sea's significant overhead eliminates its profits from sales entirely. The company is not profitable.

To get a better idea of Sea's finances, we will now look at its cash flows. Often touted as a general yardstick for a company's financial health, cash flows represent the sum of inflows and outflows of cash from all sources, including capital expenditures:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cashflow ($ k) YoY Growth (%)
2022-04-22 208,649 -806,556 1,015,205 11.42
2021-04-16 555,868 -355,322 911,190 188.6
2020-04-14 69,865 -245,862 315,727 199.4
2019-03-01 -495,220 -177,572 -317,648 n/a
  • Average free cash flow: $1.02 Billion
  • Average free cash flow growth rate: 43.1 %
  • Coefficient of variability (lower numbers indicating more stability): 127.9%

Free cash flow represents the money that Sea can use to either reinvest in the business or to reward its investors in the form of a dividend. Despite the company's recent cash flows being in the green, investors do not currently receive a dividend.

Overall, Sea seems to be a strong business with an attractive valuation in numeric terms. Potential investors may want to take a closer look at the stock, and focus on whether it also has qualitative factors that show that it can provide solid returns.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.