The glory days of SEA Limited (NYSE:SE) are over.
The once-star stock of the market is now nothing but every short seller’s favorite trade. Currently, SE is trading at pre-pandemic having erased 2 years of gains just this year alone. From a TA perspective, the price action of SE has failed to hold any of its previous support levels right up till now where the range of $30-$50 was where the stock found its support back in 2019.
In my perspective, the risk to reward at this point does seem to warrant some consideration given that the stock has retraced about 90% from its all-time highs to its present price of $45. However, even at 90% off its highs, there are still significant headwinds facing SEA Limited.
While I will be covering what management has done/will be doing, so long as macroeconomic conditions remain status quo, it is likely that we will see more sideways trading in the days ahead.
Before we dive further, disclaimer, I do hold shares of SEA Limited as my buy order at $50 finally triggered. More on this in a bit!
What’s happening to SEA Limited now?
SEA Limited finds itself facing the brunt of this bear market due to the following reasons,
- It is still not profitable and relies on borrowing to fund operations/growth. (Same overarching narrative for all growth companies)
- Specific to Chinese listed ADRs on American Exchanges: Sentiment changed with regarding to delisting fears due to accounting irregularities etc.
- Well performing segments of SEA Limited have slowed in the post-pandemic world. Gaming has slowed, eCommerce has slowed.
While all segments have slowed, what likely spooked investors the most was the slowdown in growth for their entertainment segment. This was the only segment that generated a profit previously, thanks to video game platform, Garena.
This segment saw users soar significantly during the pandemic but that came to an abrupt halt early this year where the game was banned in India.
While it is difficult for us to ascertain the impact of this ban on the revenue of SE, management has taken into consideration the “loss” of the India market in their guidance for 2022.
“Moreover, due to unanticipated government actions, Free Fire is currently unavailable in the Google Play and iOS app stores in India. The guidance takes into consideration these headwind factors.”
Source: SEA Guidance for 2022
Statistics wise, since the ban in India, monthly active users of Garena Free Fire have reduced by about 10% from 211,768,091 back in December 30, 2021 to 189,712,644 at present.
What is the TOP GOAL for SEA Limited?
“Our number one objective for the next 12-18 months is achieving self-sufficiency. This means achieving positive cashflow as soon as we can. Right now, thanks to years of prudent action and hard work, we have a solid cash base that puts us in a safer position than many of our counterparts in the tech sector.
Extracted from Forrest Li Memo to SEA Employees
However, we can easily run through this cash base if we are not careful, and with investors fleeing for ‘safe haven’ investments, we do not anticipate being able to raise funds in the market.”
Management has most certainly acted on this as every other day, we are seeing news in the headlines regarding Shopee’s fate.
In some cases, the situation went as bad as reports of job offers being rug-pulled for new employees upon arrival.
Minor headlines also include top management receiving no salaries.
Will these cost-cutting measures lead to anything?
If anything at all, doing something is better than doing nothing. As such, it is good to see that management is taking an active approach to cost-cutting however for top management to receive no salary, I believe that’s more an act of solidarity as that would hardly have a material impact on balance sheets.
On the note of staff being let go, this may appear to soothe the impact on operating costs but this may inadvertently cause problems for Shopee in the near future as issues of knowledge retention and morale surface.
What’s more important to note here is how management is taking on the path to self-sufficiency very seriously. Should SEA Limited continue to grow in revenue, the disparity between costs and profits should slim down to point where even breakeven would be considered a huge win for the company and its investors.
In my opinion, this can happen given how Q2 revenue had already exceeded management guidance (SEA eCommerce Guidance 29%, Actual 51%)
Why did I buy?
Since support levels have failed to hold, I had removed my $100 buy order and lowered it to $50. Fortunately (or unfortunately), this order was triggered last Wednesday as the stock slid to lows of $48. While we can never catch the lows of a stock, I personally like to make trades based on physiological price points as these are areas where momentum can gain.
At present, we are also seeing a divergence in the RSI where the stock has been gaining momentum while price continues to slide. This may not necessarily be a bullish signal however such a signal has commonly been associated with how the stock may have formed a bottom as it is attracting new investors.
Will the stock reach new lows?
It is difficult to conclude if the stock will hit new lows but given that we are trading at 2019 support levels, I do think that it is compelling enough to conclude that there is some margin of safety present at these levels. Short-term headwinds should also start to moderate should no more negative catalysts present themselves for the rest of this year.
If we’re looking at any near-term positive catalyst, I fear that there may be none however we can look forward to management guidance for 2023 which should be presented sometime in 1Q2023. Investors should look out for news regarding breakeven as well as how Garena has performed with the restrictions imposed on them in 2022.