Analysts at DBS Group Research, CGS International and Morningstar Research are upbeat on Sea following the company’s impressive 3QFY2024 ended September, raising their target prices and fair value estimates to US$126 ($169), US$136 and US$109 respectively.
Previously, their target prices and fair value estimates were US$99, US$118 and US$66 respectively.
For its 3QFY2024, Sea’s revenue grew 31% y-o-y to US$4.3 billion, while adjusted ebitda grew over 100% y-o-y to US$521 million — above consensus estimates, with all three business segments beating forecasts.
Highlights include SeaMoney recording a pick-up in revenue growth in 3QFY2024, with loan principal outstanding up 73% y-o-y. Non-performing loans improved q-o-q to 1.2%.
Shopee is returning to ebitda breakeven, led by gross merchandise value (GMV) of 25% y-o-y and marketplace take-rate improvement. Shopee Brazil also reached breakeven for the first time.
Morningstar’s Kai Wang believes the quarter’s outperformance reflects an inflection point and structural change for Sea. “It appears to have addressed the underlying issue that tempered our outlook, where the company was unable to achieve robust growth without compromising profitability on its platform and vice versa.
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“We think Sea has partially resolved the issue by increasing monetisation rates from the sellers on the platform, as well as increasing the ad load and charging higher fees for advertising on the platform,” Wang adds.
Sea expects gradual margin expansion ahead, as it focuses on lowering cost per order via enhanced scale and efficiency; with potential upside from rationalising incentive spend among competitors.
CGSI’s Kenneth Tan and Lim Siew Khee are keeping “add” on Sea, as they see an improved outlook for Shopee amid stabilisation of the Asean e-commerce competitive landscape and strong growth potential for its fintech segment given the huge underbanked population in Southeast Asia.
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DBS’s Sachin Mittal is also keeping “buy” on Sea. He has changed his group adjusted ebitda forecast by -2% and 8% in FY2024 and FY2025, led primarily by changes in e-commerce.
“Since the competition is benign, we project GMV growth of 27% y-o-y in FY2024, compared to management guidance of mid-20% and consensus’ 24% . We project 20% GMV growth rate in FY2025, with take rates rising gradually to 13% in FY2025 from 12.4% in FY2024.
DBS has also raised its e-commerce revenue estimates for FY2024 and FY2025 by 4% and 7% respectively. Gaming’s adjusted ebitda is revised by -2% and 3% on weaker 3QFY2024 performance, while fintech’s adjusted ebitda is revised upwards by 7% and 14% stemming from lower cost of funding for its lending businesses, as Sea is becoming a preferred lending platform.
In contrary to others, PhillipCapital analyst Helena Wang has downgraded their call to "reduce" from "neutral" previously. This is after considering recent share price movement, says Wang in her Nov 19 report.
Wang notes the "Rule of 40", which was first introduced as a benchmark to measure the balance between growth and profitability of software-as-a-service companies. The rule considers both revenue growth plus ebitda margins, with the adition of both metrics needing to exceed the 40% threshold.
PhillipCapital has modified this slightly by averaging revenue growth over three years compared to a single-period growth rate. Adding together Sea's 3-year average revenue growth of 18% and its ebitda margin of 7%, the total of 25% fell short of the analyst's required threshold of 40%.
Wang has raised her FY2024 revenue and patmi estimates by 4% and 1% respectively to account for higher Shopee and SeaMoney growth. Her target price is lifted to US$100 from US$80 previously.
Shares in Sea closed US$1.63 lower or 1.55% down on Nov 14 at US$103.33.
