SE fully valued, and at resistance. Not short, but getting ready

Sep 23

Sea, Inc. (SE) has been a nice turnaround story so far this year. The company operates in three segments, which I'd summarize as follows:

1. Shopee (73% or revenue, 25%-30% annual revenue growth) is a fast-growing ecommerce platform in SE Asia. In Q2, its EBITDA margin was just below zero, which represents three consecutive quarters of improvement, but still worse than the year-ago margin of 7%.
   
2. SeaMoney (14% or revenue, 20%+ annual revenue growth) is a digital payments and online lending platform, which obviously leverages the Shopee platform to expand its user base. This segment is highly profitable, with about a 32% EBITDA margin.
   
3. Garena (13% or revenue, -17% annual revenue decline) is an online gaming platform and video game developer. This segment is also highly profitable with a most recent quarter EBITDA margin of almost 70%.
   

The way I see it, there are three problems, two of which have gotten better, but one of which has gotten worse:

1. The Shopee platform is the biggest and fastest growing segment, but it's also the least profitable. This has been the major millstone around the stock's neck for the last two years, The company believes that it is now on the cusp of turning a profit on the segment. But it seems uncertain, whether this business will ever really be able to earn its cost of capital.
   
2. The Garena platform had lost its growth mojo. This seems to be turning a corner, now. Active users grew for the most recent 2 quarters, and bookings rose for four consecutive quarters. Revenue in Q2, however, was still down, both sequentially and over the past year.
   
3. This stock has already more than doubled this year, and it's now quite expensive. SE trades at roughly 19-20x expected 2025 EV/EBITDA. For comparison: AMZN is at 13x, EBAY is at 10x, ETSY at 9x. Only its Asian competitor CPNG (23x) and South American MELI (24x) are more expensive.
   

I believe that SE might be a compelling long-term opportunity, but for the next 2 to 4 weeks it looks like it's running on fumes. The stock has just broken through its 2023 high and is at a 2-year high. It's also just reached its VWAP since IPO for the first time since April 2022. I wouldn't be surprised if a lot of supply would come into play, right here at 90-91. If resistance doesn't materialize, I would contemplate a short position in the upper 90s.

Sep 24

Note

SE is up for a 6th day in a row. With the momentum this stock has I expect it to soon take out the 2022-08-11 high of 93.70. Hopefully, the frenzy continues towards 100 to make it a juicy short.

Sep 25

Note

The 2022-08-11 high is now taken out and SE is now up for a seventh day in a row. The VWAP since IPO has been broken without a moment's hesitation. One of two things could be the case: Either this level is no longer relevant, or the stock is just exhausting its momentum and will fall back to the VWAP, shortly. In my experience the latter is more likely.

Oct 1

Note

Another significant jump in price, and I now feel like there's enough distance to my target (90-91) to warrant a short. I have started to look for options to express my view, but haven't made a determination, yet.

To be clear, I am not fundamentally bearish on SE, I just see the current phase of the rally as overdone and in need of some retracement. Also, I am intent to wait for this current strength to dissipate before entering a position.

Oct 7

Order cancelled

A real opportunity never materialized, with the stock holding all significant supports, while also not making any further forward progress. The only very brief opportunity was during the first few minutes of trading on Wednesday. I missed it, and it also failed to follow through on the downside. At this point, the overbought condition seems worked off through time and I no longer see the setup as valid.