It’s been a good year for Sea Limited. The company overtook DBS Limited as the most valuable publicly-traded Singapore-grown company on May 21, with a valuation of $51.42 billion versus DBS’s $49.38 billion.

On August 6, Sea gained recognition as ‘the world’s hottest stock’ as it became the best-performing large-cap stock globally.

On August 19, shares in the company jumped a further 9% following a surge in revenue. Sea Limited achieved an earlier-than-expected adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) breakeven in 2Q20 on the back of a sharp rise in a profitable gaming business.

Following the spate of good news, DBS Group Research analyst Sachin Mittal has upgraded his recommendation on the stock to “buy” from “sell” with a revised target price of US$183 ($249.96), more than double the previous target price of US$72.50.

“The rising popularity of ‘Free Fire’ in Latin America and Southeast Asia is the key,” writes Mittal in a report dated August 20.

“Mounting free cash flow from gaming is Sea’s big competitive edge in the ecommerce business as many competitors face funding pressure”, he adds, projecting an adjusted revenue compound annual growth rate (CAGR) for FY19-22F of 103% for e-commerce from 69% previously.

Mital has also projected a CAGR for gaming of 40% from 24% previously due to “strong tailwinds” from the Covid-19 lockdowns.

In fact, Mittal expects street FY20F/21F adjusted revenue to “rise sharply” as his revised projections are 30% and 40% above consensus respectively.

“Sea can afford to burn more cash in the e-commerce business to raise its market share due to the cushion of higher profits from the gaming business,” says Mittal, who also expects Sea’s e-commerce and digital financial services (DFS) segments to continue to report adjusted EBITDA losses for another two years due to the “intense competition”.

To this end, Mittal values the e-commerce business at US$87 per share, previously US$33, after raising its FY20F/21F adjusted revenue by 39%/53% and switch to 9x FY21F adjusted revenue (from 4.5x previously) based on Alibaba’s 9.2x 12-month forward multiple.

He has also valued gaming business at US$90 per share, previously US$34, after raising FY20F/21F gaming earnings by 50%/57% and switching to 24x 12-month price to earnings (PE) – from 12x EV/EBIT earlier – to reflect the rise in peer valuation.

“The management has indicated strong uptake of Free Fire over July and August, which is a good sign for 3Q20F,” adds Mittal.

As at 4.13pm, shares in Sea Limited were trading at US$4.58 higher, or 3.14% up, at US$150.56.

See also: Singapore’s top 50 richest see fortunes rise 28% amid pandemic; Sea co-founders make top 25