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Even if growth is exhausted for its gaming division, e-commerce opportunities could still be ahead for Sea Limited (NYSE: SE). In this clip from “3 Minute Stocks Updates” on Motley Fool Live, recorded on March 30, Motley Fool contributors Brian Withers and Toby Bordelon discuss why now might be a smart time to buy into Sea Limited despite investors being unenthusiastic with the quarter.
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Brian Withers: Investors didn’t like the quarter. Let’s take a look at why. They announced beginning of March, you can see 3/1 BMO, means Before Market Open, and I updated the slide. You can see this last E here. The stock went down considerably after earnings. Then, it’s ticked up a bit but it is, over the last year, down 39%. Why? Part of it is really the guidance. If you look at these DE bookings, DE means digital entertainment. Its game hosting division as well as its home-grown Free Fire game, which is available in more than 100 countries around the world. It’s been the cash cow for the company. To have bookings decline, that means that commitments in sign-ups for the upcoming quarter and the upcoming year, they expect that to decline. The e-commerce business, and you can see SeaMoney here, are growing like crazy. But, investors were very concerned in this digital entertainment segment and have really taken a step back. For me, I think it was a matter of time. A lot of people went to video games to pass their time during the coronavirus. Free Fire is one of the most downloaded games across the world. It’s not surprising that the excitement for that game is tempered a bit. I still like this company. The e-commerce opportunities and its optionality to grow, I think, are tremendous and I think it’s at a good price right now.
Toby Bordelon: Brian, let’s just assume that the gaming is done for them in terms of growth. Let’s just take that out of the equation for a second. Can it still be a great investment without that? Is there enough growth left in, say, the e-commerce part for you to buy and hold this stock or is the optionality you’re talking about, is that really a key part of this investment thesis?
Withers: Yeah. Let’s look at the digital entertainment division. It makes up 45% of the revenue, but 97% of the gross profit dollars, so think of that profit engine funding Amazon‘s (NASDAQ: AMZN) fulfillment growth. It’s the same thing here. But even if the gaming division stays stagnant, the company continued to invest like it has been for years before it has to change its strategy. The optionality that I mentioned, outside of gaming, there’s ability to go into more countries, sell more products. It’s just starting to get into first-party sales. It’s starting to get into Brazil with its Shopee e-commerce platform and its payments platform, SeaMoney, of course, is just growing at gangbusters. I still like the valuation today and think it’s a smart buy at these prices.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brian Withers owns Sea Limited. Toby Bordelon owns Amazon and has the following options: long January 2024 $170 calls on Sea Limited, short April 2022 $210 calls on Sea Limited, and short January 2024 $170 puts on Sea Limited. The Motley Fool owns and recommends Amazon and Sea Limited. The Motley Fool has a disclosure policy.
