Note from Daily Trade Alert: The following article first appeared in The Growth Stock Advisor, a premium newsletter offered by Investors Alley.

One of the most successful companies—and stocks—throughout the pandemic is one that many U.S. investors don’t even know exists… even though it trades on the New York Stock Exchange.

This company, Sea Ltd (SE), is currently Southeast Asia’s largest public company. Its stock has rocketed more than 450% over the past year and now has a market capitalization in excess of $125 billion.

How has Sea done it? Simple: by becoming the dominant e-commerce company in the region. Pretty good for a company that started its corporate life in 2009 as a gaming company called Garena. Early backers included China’s Tencent (TCEHY), which continues to be a major shareholder in the company.

Garena launched its e-commerce arm, Shopee, in 2015 and changed its name to Sea in 2017. Shopee is now the most visited e-commerce website in the six countries in which it operates, according to quarterly data from research firm iPrice.

Sea has managed to overwhelm even those rivals backed by deep-pocketed companies like Alibaba (BABA) and Softbank (SFTB). For example, look at the region’s largest market, Indonesia.

The country had been host to a cozy three-way competition between evenly matched unicorns—Gojek, Grab and Tokopedia. But then Sea entered the battle with its Shopee e-commerce platform, which is now Indonesia’s most visited e-commerce platform. Sea is poised to walk away with most of that fast-growing, and sizable, market. Indonesia’s digital economy grew fivefold to $44 billion in 2020!

Sea has repeated that performance across the region, in places like Thailand and the Philippines. Its growth has been so rapid that it is forcing rivals in the region to consider their options, including mergers, to compete against the Singaporean company’s onslaught.

Grab will soon be listing here in the U.S. through a recently announced deal with a SPAC, Altimeter Growth (AGC). But that will not stop Sea. The company’s ambitions go well beyond just e-commerce in Southeast Asia.

A Closer Look at Sea

Sea’s leadership knows the company has one huge advantage over its unicorn competitors: it is publicly listed. That means it can raise capital quickly, and on a scale unimaginable to its privately-owned rivals who must go back to their investors and arrange new funding rounds every time they want to raise more money.

Sea’s access to funding, along with cash from its profitable gaming business, is crucial, because aggressive promotion strategies are a centerpiece of Sea’s growth strategy. The company offers free delivery and cashback on purchases. And of course, the usual promotions, such as the chance to win a Mercedes-Benz in this year’s Chinese New Year promotion.

The sheer scale of Sea’s incentives—its “cash burn”—is enormous. The company has made consecutive annual losses since at least 2017 when it went public. And this is despite a huge ramp-up in revenue. Last year, for example, Sea’s total revenue doubled to $4.37 billion, but that increase was eaten up by total expenses for sales and marketing, which rose 89% to $1.8 billion along with others—a net loss of $1.61 billion.

However, Sea’s gaming business allows it to pursue such a strategy. While e-commerce revenues exceeded those of gaming in 2020, the company’s gaming business—currently the only profitable arm of the company—continues to be the cash cow. Proceeds are used to fund the growth in its other businesses.

Here is a look inside Sea:

  • The company’s Garena gaming business sells smartphone games globally. Its self-developed Free Fire game is a huge hit and will be a big revenue generator for years. Garena reported a $1 billion profit in 2020.
  • The Shopee e-commerce platform was launched in 2017 and reported a $1.4 billion loss in 2020.
  • The SeaMoney finance business operates in five Southeast Asian countries under the ShopeePay and AirPay brands and won a digital banking license in Singapore. SeaMoney reported a $520 million loss in 2020.

Sea’s Future

The company also made huge inroads into payments last year, while quietly moving into other areas like food delivery. That looked like a master stroke by company management, as the coronavirus pandemic struck. Sea’s core businesses of gaming, e-commerce, digital payments and even food delivery all took off due to changes in consumer habits during the pandemic.

Sea’s main competition in the region will likely come from the aforementioned Grab. Grab was founded as a taxi booking app, so initially, it was not a direct competitor. But as both companies expanded their fintech services—and Grab moved into grocery delivery as well—the two businesses gradually overlapped.

The main battleground between Sea and Grab looks to be in fintech. Both companies are set to launch their digital banks in Singapore in early 2022. And the two rivals plan to duplicate the digital banking business model in other Southeast Asian countries. There is a massive opportunity in this market, with tens of millions of underbanked people possibly using their platforms.

There will also be a food fight between the two over food delivery in Southeast Asia. Vietnam is the only market in six major Southeast Asian countries in which Grab does not have the top share in food delivery, according to a report from the consultancy Momentum Works. The top food delivery company in Vietnam in 2020 was Now. And, as you might have guessed, it’s operated by a Sea subsidiary, Foody. Foody has a 42% market share in Vietnam, versus Grab’s 40%.

Finally, Sea is exploring new markets beyond Southeast Asia. It is expanding its e-commerce business in Latin America’ biggest economies, and already has a significant presence in Brazil’s gaming market.

Sea is making all the right moves. That’s why its stock has performed so well.

The question, though—as with so many young tech firms—is whether Sea will ever turn profitable. I believe it will within 2–3 years; however, nothing is assured. It has some tough competitors like Grab that could stand in its way.

So for those reasons, I will just make Sea a 4-star stock. It’s a buy at any price up to $275 a share.

— Tony Daltorio

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Source: Growth Stock Advisor