Tag Archives: PYPL

PayPal Valuation Stretched But Still Not At Peak

This December saw the first 10% drop in PayPal’s (NASDAQ: PYPL) stock in the last year or so. But is this a dip to be bought or are there more serious issues threatening the company’s growth?

A cyclical exit from tech companies, the company’s stock price climbing too high too fast and even Bitcoin’s potential to take over the world have been mentioned as reasons. Can these factors stop the company and cause a real correction or is it just some profit taking by investors who rely on P/E (which is indeed high) and are quite happy with an 80% jump in the last year?

The short answer is no.

There are simply no signs of slowing growth, quite the opposite. The latest management moves and the overall environment are not only favorable but actually improving for the company and its future guidance seems conservative to me. Here’s why.

Last month saw the company solve one of the issues that had caused concern among investors – its PayPal Credit unit. That unit has so far been a source of growth and is part of the larger puzzle that PayPal aims to become – a payment company that can not only handle every type of transaction that you’d want but also a one-stop shop for anything money related.

But there was a caveat: PayPal Credit is susceptible to downturns in the economy and any unreasonable exposure could turn into something between a nuisance and a disaster. The board was well aware of this and engineered a deal with Synchrony Financial (NYSE: SYF) worth $6.8 billion, with the latter acquiring the U.S. receivables portfolio together with a profit-sharing agreement.

Not as sexy as monetizing Venmo (we’ll get to them in a minute) or riding the huge mobile payments wave, but it’s a great old-fashioned corporate deal that ticks the boxes on what needed to be done. It not only limits risk but also frees up capital (to the tune of $1 billion annually) that can serve other purposes.

One of these other purposes is partnerships and expanding the network of merchants and companies that utilize PayPal. Two of the most recent ones also are targeting what I think is the most important metric – transactions per account (which stand at 32.3 per year as of Q2 in 2017).

The millennial investment app Acorns now allows users to use PayPal to transfer money both ways, as well as monitoring their portfolio and tracking their investments through PayPal. A partnership with a European “deposit marketplace” called Raisin also was announced and although both will not have an immediate effect on the bottom line, they are aimed at getting more of the bread and butter transactions that the company will rely on – set-and-forget payments or transactions completed with several taps in a single app.

Talking of single apps and ease of use, PayPal’s One Touch has allowed the company to tap in the shift to mobile payments that we see across society. As of November 8th, six million merchants utilize it (around a third of the total) and 70 of the total 218 million active accounts have registered with it.

Mobile payment volume was $40 billion in Q3, over 50% growth on a yearly basis with mobile payments making just over one-third of the total payment volume. The course is set and the means to take more of the projected share are in place.


Source: Statista

About Venmo. I don’t think it’s the game changer that many in the PayPal investment community think it is. It’s growing for sure but for me it is yet unproven and is the one point where Apple Pay (NASDAQ:AAPL), Samsung Pay (OTC:SSNLF) and potentially Square (NYSE: SQ) can actually land a punch. $9.4 billion in transaction volume last quarter and making it available in around two million U.S. retailers are signs of a growing business, but whether it will be used for retail purchases by its user base remains to be seen. I could be surprised on the upside in the coming 3-6 quarters. But as long as the company isn’t revealing the number of its users I won’t be holding my breath and including this in the factors that can contribute to sustained growth.

Another partnership announced recently requires far more attention than it’s getting. Baidu (NASDAQ:BIDU) announced recently that they will offer PayPal as an option to its users and this could be the gateway for the payment provider to establish a beachhead in a market that’s already focused on mobile payments.

Right now it seems like nothing more than said beachhead, as Baidu has a very small percentage of mobile transaction volume compared to its competition. But if PayPal is truly a superior product and if it allows Chinese consumers to buy imports more easily (which they have been doing – $60 billion in e-commerce payments for 2016) it should carve out a solid enough niche to create a steady and sizeable income stream within several years.

Not that all these developments are unnoticed by investors, or are unaccounted for in the company’s projections. But it looks as if they’re being understated due to caution and trying not to overreach.

Conclusion: A 21% increase in earnings and 20% for revenue is a solid enough forecast but I think we’ll see that these will be lower than what we actually get. User growth has been in the mid-teens and will probably remain thereabouts. But it is merchant growth where I think the network effect will surpass expectations in 2018 and directly impact the bottom line and the stock price. With these in mind I am placing my target for next year at $96.


Source: Tradingview

Risks do remain – a fumble of the Venmo play could hamper the company’s whole mobile payments concept and a security breach is always a possibility in today’s environment. But at this point in time there are no indicators that there is a confirmed threat to the optimism surrounding the company or its sector.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:ExpandAuthor payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.Tagged: Investing Ideas, Long Ideas, TechnologyWant to share your opinion on this article? Add a comment.Disagree with this article? Submit your own.To report a factual error in this article, click here

Sea: Not The Quarter We Were Looking For

I’ve never understood why any investors were particularly excited about the Sea (NYSE: SE) IPO, the Singapore-based internet platform that operates a digital gaming platform and distributes League of Legends in Southeast Asia (its biggest source of revenues), an e-commerce platform that has yet to generate significant revenue, and a burgeoning digital wallet/payments product that’s akin to Southeast Asia’s PayPal (NASDAQ: PYPL). The company got a kick earlier this month when the quiet period expired and Wall Street started doling out praises for the company. Most notably, Goldman Sachs (NYSE: GS) came out in full cheerleader mode for the company, setting a $22 price target; though we also have to note Goldman was lead left bookrunner on the IPO and we have to take its word with a bit (or a lot) of salt.

Yes, the company operates in some of the largest “tiger economy” countries in the world – but what happens when its games stop becoming popular? The teenagers that make up the majority of Sea’s fan base undoubtedly have changing tastes, and if they stop buying the virtual items that provide ~85% of Sea’s revenue, the company is lost. With net margins worse than -100% and losses doubling y/y, it’s not clear whether this company has a path to sustained growth.

At Sea’s current market cap of $4.5 billion, it’s valued at ~33% more than Zynga (NASDAQ: ZNGA), which has a market cap of $3.5 billion. Zynga has twice the revenue base of Sea and grew revenues by 23% in its most recent quarter, after a period of struggling with decline; and it also started turning profits in Q2 of this year. While I wouldn’t recommend either company, if you must buy a gaming company, at least go for Zynga.

Chart
SE data by YCharts

As seen from the chart above, Sea has started to slip from its IPO at the $15 handle. Practically the only positive factor supporting the stock’s valuation is the company’s exposure to Greater Southeast Asia (GSEA), but with the Sea’s rather poor execution, it may hardly matter. As I wrote in my initial article, it’s important for the company to show revenue diversification beyond gaming. If it’s going to aspire to be the Alibaba (NYSE: BABA) of GSEA, then it had better start showing monetization in e-commerce and payments – not just GMV increases. Q3, despite posting $3.2 million in revenues in the e-commerce segment for the first time, showed no meaningful progress in this regard as it’s still a tiny portion of the company’s overall revenues.

Continue to stay away from Sea. Better internet/e-commerce companies to invest in include PayPal (NASDAQ: PYPL), Etsy (NASDAQ: ETSY), and Stitch Fix (NASDAQ: SFIX). I doubt it’ll be long before Sea slips below $10, and even then at a $3 billion market cap, it’s still overvalued.

Q3 recap

Let’s take a closer look at Sea’s Q3, its first earnings release since going public (also note that usually, a poor reaction to the first earnings release is a terrible indicator for IPO momentum).

Figure 1. Sea Q3 revenues
Source: Sea Q3 earnings release

As seen in the chart above, taken from Sea’s Q3 earnings release, Digital Entertainment still commanded the lion’s share of business in Q3, with 85% of revenues (though this is down from 95% in the year-ago quarter). Total gaming revenues actually declined 7% y/y, however, to $79.8 million – illustrating just how risky it is to tether an entire business to online gaming.

Digital gaming’s gross margin also fell considerably to 30% in the quarter, down from 46% in the prior-year quarter. As a distributor, Sea doesn’t own the creative rights to games like League of Legends, and it’s subject to higher licensing fees by content creators. The entertainment industry as a whole is placing greater emphasis on content, which underpins Netflix’s (NASDAQ: NFLX) multi-billion dollar investment into Netflix Originals and deals like AT&T’s (NYSE: T) bid for Time Warner and Disney (NYSE: DIS) and Verizon’s (NASDAQ: VZ) interest in Fox (NYSE: FOXA). Even though Sea is in a slightly different industry and a continent away, the fundamental rules still apply: it’s the content owners that call the shots, not the distributors. While it’s too early to call Sea’s margin decline a sustained trend, the lack of real control over its margins will always be a risk.

Sea’s earnings release highlights billings growth instead of its rather lackluster revenue growth. This is a metric more commonly associated with enterprise software companies, calculated by adding the change in deferred revenues to revenue in any given quarter. Sea’s in-game items and virtual currency sales, as a refresher, are accounted for as deferred revenue on the balance sheet and are recognized as revenue as the items expire. Total billings grew 73% y/y to $151.7 million (also a 21% sequential growth rate from Q2), so this marks somewhat of a bright spot, but still doesn’t excuse the poor revenue growth seen in Q2.

In Sea’s “Other” segment – which accounts for its e-commerce (Shoppee) and financial services (AirPay) products, revenue grew 3x to $14.3 million, but at only 15% of the total revenue base, it’s still an insignificant contribution to Sea as a whole. Consider especially that this line of business has a negative gross margin – its cost of revenue is $27.7 million to produce $14.3 million of revenue, indicating nearly a -200% gross margin.

In “high growth mode,” profitability is less important – it’s forgivable if the company operates at a loss. But gross margin, at least, should be positive – especially for an internet business with few raw inputs beyond server costs and customer support bills.

The company finally started showing revenue in e-commerce ($3.2 million) that didn’t exist in the prior year quarter, but at such poor margins, investors can hardly be blamed for being less than enthusiastic.

Overall, the company produced a net loss of -$132.8 million in the quarter, approximately double 3Q16’s loss of -$65.6 million. A quick note here: most tech IPOs typically show large net losses due to stock comp; their pro forma earnings figures are a lot less scary when you add back these non-cash charges. Sea, however, has minimal stock-based comp expenses ($5.7 million), so its adjusted loss is still a frighteningly high figure, -$127.1 million.

Based even on its adjusted figure, Sea posted a -135% net margin and a per-share net loss of -$0.75. Not a company I’d want to bet my portfolio on.

60-second summary

Sea operates an oddball mix of businesses: gaming, e-commerce, and digital financial services. The latter two have much more synergy and are much more promising in the longer term, but at only 15% of the current revenue base, even hopeful investors have to agree that these businesses are years away from achieving meaningful scale.

Thus we have to look at Sea as a gaming business – an industry that’s notoriously fickle and prone to fads. In particular, what we saw in Q3 – declining revenues (despite billings growth) and contracting margins – sends out a scary signal for long investors in Sea. The company’s main revenue engine is seeing signs of weakness while its burgeoning e-commerce and fintech businesses are creating massive losses. At some point, it’s worth asking whether or not it’s realistic for a company like Sea to fulfill its vision of becoming GSEA’s Alibaba before running out of cash. More than likely, other Asian internet conglomerates (and there are plenty) will rush in to claim the market and knock Sea down to its heels. And with Sea’s gaming business weighing down the company with its lack of proprietary content and shrinking margins, I don’t really see Sea as an M&A target either.

Continue to avoid Sea – the limited support the stock has seen since going public will erode soon enough. There are better internet companies to invest in.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:ExpandAuthor payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.Tagged: Investing Ideas, IPO Analysis, Technology, Multimedia & Graphics Software, SingaporeWant to share your opinion on this article? Add a comment.Disagree with this article? Submit your own.To report a factual error in this article, click here

Sea: Not The Quarter We Were Looking For

I’ve never understood why any investors were particularly excited about the Sea (NYSE: SE) IPO, the Singapore-based internet platform that operates a digital gaming platform and distributes League of Legends in Southeast Asia (its biggest source of revenues), an e-commerce platform that has yet to generate significant revenue, and a burgeoning digital wallet/payments product that’s akin to Southeast Asia’s PayPal (NASDAQ: PYPL). The company got a kick earlier this month when the quiet period expired and Wall Street started doling out praises for the company. Most notably, Goldman Sachs (NYSE: GS) came out in full cheerleader mode for the company, setting a $22 price target; though we also have to note Goldman was lead left bookrunner on the IPO and we have to take its word with a bit (or a lot) of salt.

Yes, the company operates in some of the largest “tiger economy” countries in the world – but what happens when its games stop becoming popular? The teenagers that make up the majority of Sea’s fan base undoubtedly have changing tastes, and if they stop buying the virtual items that provide ~85% of Sea’s revenue, the company is lost. With net margins worse than -100% and losses doubling y/y, it’s not clear whether this company has a path to sustained growth.

At Sea’s current market cap of $4.5 billion, it’s valued at ~33% more than Zynga (NASDAQ: ZNGA), which has a market cap of $3.5 billion. Zynga has twice the revenue base of Sea and grew revenues by 23% in its most recent quarter, after a period of struggling with decline; and it also started turning profits in Q2 of this year. While I wouldn’t recommend either company, if you must buy a gaming company, at least go for Zynga.

Chart
SE data by YCharts

As seen from the chart above, Sea has started to slip from its IPO at the $15 handle. Practically the only positive factor supporting the stock’s valuation is the company’s exposure to Greater Southeast Asia (GSEA), but with the Sea’s rather poor execution, it may hardly matter. As I wrote in my initial article, it’s important for the company to show revenue diversification beyond gaming. If it’s going to aspire to be the Alibaba (NYSE: BABA) of GSEA, then it had better start showing monetization in e-commerce and payments – not just GMV increases. Q3, despite posting $3.2 million in revenues in the e-commerce segment for the first time, showed no meaningful progress in this regard as it’s still a tiny portion of the company’s overall revenues.

Continue to stay away from Sea. Better internet/e-commerce companies to invest in include PayPal (NASDAQ: PYPL), Etsy (NASDAQ: ETSY), and Stitch Fix (NASDAQ: SFIX). I doubt it’ll be long before Sea slips below $10, and even then at a $3 billion market cap, it’s still overvalued.

Q3 recap

Let’s take a closer look at Sea’s Q3, its first earnings release since going public (also note that usually, a poor reaction to the first earnings release is a terrible indicator for IPO momentum).

Figure 1. Sea Q3 revenues
Source: Sea Q3 earnings release

As seen in the chart above, taken from Sea’s Q3 earnings release, Digital Entertainment still commanded the lion’s share of business in Q3, with 85% of revenues (though this is down from 95% in the year-ago quarter). Total gaming revenues actually declined 7% y/y, however, to $79.8 million – illustrating just how risky it is to tether an entire business to online gaming.

Digital gaming’s gross margin also fell considerably to 30% in the quarter, down from 46% in the prior-year quarter. As a distributor, Sea doesn’t own the creative rights to games like League of Legends, and it’s subject to higher licensing fees by content creators. The entertainment industry as a whole is placing greater emphasis on content, which underpins Netflix’s (NASDAQ: NFLX) multi-billion dollar investment into Netflix Originals and deals like AT&T’s (NYSE: T) bid for Time Warner and Disney (NYSE: DIS) and Verizon’s (NASDAQ: VZ) interest in Fox (NYSE: FOXA). Even though Sea is in a slightly different industry and a continent away, the fundamental rules still apply: it’s the content owners that call the shots, not the distributors. While it’s too early to call Sea’s margin decline a sustained trend, the lack of real control over its margins will always be a risk.

Sea’s earnings release highlights billings growth instead of its rather lackluster revenue growth. This is a metric more commonly associated with enterprise software companies, calculated by adding the change in deferred revenues to revenue in any given quarter. Sea’s in-game items and virtual currency sales, as a refresher, are accounted for as deferred revenue on the balance sheet and are recognized as revenue as the items expire. Total billings grew 73% y/y to $151.7 million (also a 21% sequential growth rate from Q2), so this marks somewhat of a bright spot, but still doesn’t excuse the poor revenue growth seen in Q2.

In Sea’s “Other” segment – which accounts for its e-commerce (Shoppee) and financial services (AirPay) products, revenue grew 3x to $14.3 million, but at only 15% of the total revenue base, it’s still an insignificant contribution to Sea as a whole. Consider especially that this line of business has a negative gross margin – its cost of revenue is $27.7 million to produce $14.3 million of revenue, indicating nearly a -200% gross margin.

In “high growth mode,” profitability is less important – it’s forgivable if the company operates at a loss. But gross margin, at least, should be positive – especially for an internet business with few raw inputs beyond server costs and customer support bills.

The company finally started showing revenue in e-commerce ($3.2 million) that didn’t exist in the prior year quarter, but at such poor margins, investors can hardly be blamed for being less than enthusiastic.

Overall, the company produced a net loss of -$132.8 million in the quarter, approximately double 3Q16’s loss of -$65.6 million. A quick note here: most tech IPOs typically show large net losses due to stock comp; their pro forma earnings figures are a lot less scary when you add back these non-cash charges. Sea, however, has minimal stock-based comp expenses ($5.7 million), so its adjusted loss is still a frighteningly high figure, -$127.1 million.

Based even on its adjusted figure, Sea posted a -135% net margin and a per-share net loss of -$0.75. Not a company I’d want to bet my portfolio on.

60-second summary

Sea operates an oddball mix of businesses: gaming, e-commerce, and digital financial services. The latter two have much more synergy and are much more promising in the longer term, but at only 15% of the current revenue base, even hopeful investors have to agree that these businesses are years away from achieving meaningful scale.

Thus we have to look at Sea as a gaming business – an industry that’s notoriously fickle and prone to fads. In particular, what we saw in Q3 – declining revenues (despite billings growth) and contracting margins – sends out a scary signal for long investors in Sea. The company’s main revenue engine is seeing signs of weakness while its burgeoning e-commerce and fintech businesses are creating massive losses. At some point, it’s worth asking whether or not it’s realistic for a company like Sea to fulfill its vision of becoming GSEA’s Alibaba before running out of cash. More than likely, other Asian internet conglomerates (and there are plenty) will rush in to claim the market and knock Sea down to its heels. And with Sea’s gaming business weighing down the company with its lack of proprietary content and shrinking margins, I don’t really see Sea as an M&A target either.

Continue to avoid Sea – the limited support the stock has seen since going public will erode soon enough. There are better internet companies to invest in.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:ExpandAuthor payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.Tagged: Investing Ideas, IPO Analysis, Technology, Multimedia & Graphics Software, SingaporeWant to share your opinion on this article? Add a comment.Disagree with this article? Submit your own.To report a factual error in this article, click here

Sea: Not The Quarter We Were Looking For

I’ve never understood why any investors were particularly excited about the Sea (NYSE: SE) IPO, the Singapore-based internet platform that operates a digital gaming platform and distributes League of Legends in Southeast Asia (its biggest source of revenues), an e-commerce platform that has yet to generate significant revenue, and a burgeoning digital wallet/payments product that’s akin to Southeast Asia’s PayPal (NASDAQ: PYPL). The company got a kick earlier this month when the quiet period expired and Wall Street started doling out praises for the company. Most notably, Goldman Sachs (NYSE: GS) came out in full cheerleader mode for the company, setting a $22 price target; though we also have to note Goldman was lead left bookrunner on the IPO and we have to take its word with a bit (or a lot) of salt.

Yes, the company operates in some of the largest “tiger economy” countries in the world – but what happens when its games stop becoming popular? The teenagers that make up the majority of Sea’s fan base undoubtedly have changing tastes, and if they stop buying the virtual items that provide ~85% of Sea’s revenue, the company is lost. With net margins worse than -100% and losses doubling y/y, it’s not clear whether this company has a path to sustained growth.

At Sea’s current market cap of $4.5 billion, it’s valued at ~33% more than Zynga (NASDAQ: ZNGA), which has a market cap of $3.5 billion. Zynga has twice the revenue base of Sea and grew revenues by 23% in its most recent quarter, after a period of struggling with decline; and it also started turning profits in Q2 of this year. While I wouldn’t recommend either company, if you must buy a gaming company, at least go for Zynga.

Chart
SE data by YCharts

As seen from the chart above, Sea has started to slip from its IPO at the $15 handle. Practically the only positive factor supporting the stock’s valuation is the company’s exposure to Greater Southeast Asia (GSEA), but with the Sea’s rather poor execution, it may hardly matter. As I wrote in my initial article, it’s important for the company to show revenue diversification beyond gaming. If it’s going to aspire to be the Alibaba (NYSE: BABA) of GSEA, then it had better start showing monetization in e-commerce and payments – not just GMV increases. Q3, despite posting $3.2 million in revenues in the e-commerce segment for the first time, showed no meaningful progress in this regard as it’s still a tiny portion of the company’s overall revenues.

Continue to stay away from Sea. Better internet/e-commerce companies to invest in include PayPal (NASDAQ: PYPL), Etsy (NASDAQ: ETSY), and Stitch Fix (NASDAQ: SFIX). I doubt it’ll be long before Sea slips below $10, and even then at a $3 billion market cap, it’s still overvalued.

Q3 recap

Let’s take a closer look at Sea’s Q3, its first earnings release since going public (also note that usually, a poor reaction to the first earnings release is a terrible indicator for IPO momentum).

Figure 1. Sea Q3 revenues
Source: Sea Q3 earnings release

As seen in the chart above, taken from Sea’s Q3 earnings release, Digital Entertainment still commanded the lion’s share of business in Q3, with 85% of revenues (though this is down from 95% in the year-ago quarter). Total gaming revenues actually declined 7% y/y, however, to $79.8 million – illustrating just how risky it is to tether an entire business to online gaming.

Digital gaming’s gross margin also fell considerably to 30% in the quarter, down from 46% in the prior-year quarter. As a distributor, Sea doesn’t own the creative rights to games like League of Legends, and it’s subject to higher licensing fees by content creators. The entertainment industry as a whole is placing greater emphasis on content, which underpins Netflix’s (NASDAQ: NFLX) multi-billion dollar investment into Netflix Originals and deals like AT&T’s (NYSE: T) bid for Time Warner and Disney (NYSE: DIS) and Verizon’s (NASDAQ: VZ) interest in Fox (NYSE: FOXA). Even though Sea is in a slightly different industry and a continent away, the fundamental rules still apply: it’s the content owners that call the shots, not the distributors. While it’s too early to call Sea’s margin decline a sustained trend, the lack of real control over its margins will always be a risk.

Sea’s earnings release highlights billings growth instead of its rather lackluster revenue growth. This is a metric more commonly associated with enterprise software companies, calculated by adding the change in deferred revenues to revenue in any given quarter. Sea’s in-game items and virtual currency sales, as a refresher, are accounted for as deferred revenue on the balance sheet and are recognized as revenue as the items expire. Total billings grew 73% y/y to $151.7 million (also a 21% sequential growth rate from Q2), so this marks somewhat of a bright spot, but still doesn’t excuse the poor revenue growth seen in Q2.

In Sea’s “Other” segment – which accounts for its e-commerce (Shoppee) and financial services (AirPay) products, revenue grew 3x to $14.3 million, but at only 15% of the total revenue base, it’s still an insignificant contribution to Sea as a whole. Consider especially that this line of business has a negative gross margin – its cost of revenue is $27.7 million to produce $14.3 million of revenue, indicating nearly a -200% gross margin.

In “high growth mode,” profitability is less important – it’s forgivable if the company operates at a loss. But gross margin, at least, should be positive – especially for an internet business with few raw inputs beyond server costs and customer support bills.

The company finally started showing revenue in e-commerce ($3.2 million) that didn’t exist in the prior year quarter, but at such poor margins, investors can hardly be blamed for being less than enthusiastic.

Overall, the company produced a net loss of -$132.8 million in the quarter, approximately double 3Q16’s loss of -$65.6 million. A quick note here: most tech IPOs typically show large net losses due to stock comp; their pro forma earnings figures are a lot less scary when you add back these non-cash charges. Sea, however, has minimal stock-based comp expenses ($5.7 million), so its adjusted loss is still a frighteningly high figure, -$127.1 million.

Based even on its adjusted figure, Sea posted a -135% net margin and a per-share net loss of -$0.75. Not a company I’d want to bet my portfolio on.

60-second summary

Sea operates an oddball mix of businesses: gaming, e-commerce, and digital financial services. The latter two have much more synergy and are much more promising in the longer term, but at only 15% of the current revenue base, even hopeful investors have to agree that these businesses are years away from achieving meaningful scale.

Thus we have to look at Sea as a gaming business – an industry that’s notoriously fickle and prone to fads. In particular, what we saw in Q3 – declining revenues (despite billings growth) and contracting margins – sends out a scary signal for long investors in Sea. The company’s main revenue engine is seeing signs of weakness while its burgeoning e-commerce and fintech businesses are creating massive losses. At some point, it’s worth asking whether or not it’s realistic for a company like Sea to fulfill its vision of becoming GSEA’s Alibaba before running out of cash. More than likely, other Asian internet conglomerates (and there are plenty) will rush in to claim the market and knock Sea down to its heels. And with Sea’s gaming business weighing down the company with its lack of proprietary content and shrinking margins, I don’t really see Sea as an M&A target either.

Continue to avoid Sea – the limited support the stock has seen since going public will erode soon enough. There are better internet companies to invest in.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:ExpandAuthor payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.Tagged: Investing Ideas, IPO Analysis, Technology, Multimedia & Graphics Software, SingaporeWant to share your opinion on this article? Add a comment.Disagree with this article? Submit your own.To report a factual error in this article, click here