Is Sea worth US$315 a share?

• Sea Ltd (NYSE: SE) share price hits US$280 a share, up 4.7%
• CIMB raised its price target ahead of Sea’s potential index inclusion
• Morgan Stanley noted Sea is becoming a ‘super app’
• But Tellimer believes the performance is unsustainable
• Trade Singapore company shares, long or short, with a live or demo IG account

Sea share price: What’s the latest?

Singapore-based Sea, which owns e-commerce site Shopee and gaming platform Garena, rose 4.7% to US$280 on Friday, on a volume of 3.5 million shares.

Year-to-date, the stock has soared 41%, following a nearly 400% surge during 2020.

Out of 21 analysts, 17 recommended ‘buy’ on Sea, two rated it ‘hold’ while two had ‘sell’ calls, according to Bloomberg data. Their average 12-month target price was US$240.63.

What are the upsides?

Citing Sea’s ‘solid execution’ across gaming, e-commerce and fintech, CIMB last week upped its expectations to US$315 per share - one of the most bullish target prices - from US$210 previously, and reiterated ‘add’.

CIMB analysts foresee ‘further share price re-rating supported by strong operational data’. ‘Free Fire’ remained the top-grossing game in key markets - Indonesia, India and Brazil - while Shopee retained its Southeast Asian market leadership.

Potential catalysts to drive Sea shares even higher in the near term are ‘strong’ fourth quarter of 2020 results, to be announced on 02 March, and its likely inclusion in the MSCI Singapore Index this May, CIMB wrote.

CIMB expects Sea to hold the largest weight of about 20% in the index post-rebalancing, taking over the current top position from DBS. This could translate into US$2.5 billion in passive inflow for Sea and boost institutional interest in the stock, the analysts estimated.

They forecast Sea to report US$1.9 billion adjusted revenue for Q4 2020, up 12.6% quarter-on-quarter and more than double year-on-year.

Morgan Stanley analysts also recently upped their target, to US$250 a share, from US$188. They cited higher monetisation from Shopee and growing revenue from the gaming arm, and noted Sea is ‘establishing itself as a super app’ in Southeast Asia.

Is a sell-off imminent?

However, some naysayers remained pessimistic about the digital entertainment firm’s prospects.

Tellimer’s Nirgunan Tiruchelvam said Sea’s massive gross merchandise value (GMV) growth last year, amid the pandemic, created ‘one-off revenue’ that is unlikely to be sustainable. He pointed out that Sea’s GMV increase slowed down in Q3 2020 following a spike in previous quarters.

In Tiruchelvam’s view, ‘investors will eventually make the distinction between pandemic revenue and recurring revenue’, and with lockdowns easing in Southeast Asia, ‘the hockey-stick type growth seen at the peak of the health crisis is evaporating’.

He believes Sea’s shares are rallying on non-financial metrics, as investors focused on line items in the quarterly results such as the number of users or hours of usage while overlooking the fact that the firm is loss-making and unlikely to be cash-flow positive for ‘many quarters’.