DBS Group Research analyst Sachin Mittal has maintained his “buy” recommendation on Sea Limited due to the “surging popularity” of its in-house developed game, Free Fire.
Free Fire became the most downloaded mobile game in 2Q2020 beating rival PUBG Mobile, and it continues to be aided by the ongoing Covid-19-induced movement restrictions and the PUBG ban in India, one of the latter’s biggest markets.
“The mounting cash flows from gaming business would be a big competitive edge in consolidating its leadership position in the e-commerce business and kick-starting growth of its nascent payment business,” says Mittal in an Oct 16 report.
“We project FY19-22F adjusted revenue compound annual growth rate (CAGR) of 91% for e-commerce, 34% for gaming and 182% for payments business,” he adds.
On that, Mittal has also increased Sea’s target price to US$190 ($258.04) from US$183 previously.
“We value e-commerce business at US$97/share (prev S$87), gaming business at US$85 (prev US$90) and payment business at US$4 (prev US$2.60). One key change is that we switch from 9x adjusted revenue for the e-commerce business to 1x 12-month forward Gross Merchandise Value (GMV) to reflect Sea Ltd’s focus on GMV even at the cost of revenue,” he notes.
While Mittal has adjusted FY2020F/2021F revenue to 9%/20% above consensus, he expects Sea to burn more cash in its e-commerce and payment businesses to raise its market share. This may lead both to continue to report adjusted EBITDA losses for the period.
Mittal has also identified key risks on the counter, including its over-dependence on Free Fire and weak cross-border commerce business.
“Our projections could be at risk if Free Fire slows down next year and if Sea cannot develop a pipeline of new games. For e-commerce, cross-border revenue could disappoint due to the regulatory issues,” he says.
Shares in Sea Limited closed at US$165.20 on Oct 19.