Sea: Pullback May Continue In The Near-Term (Rating Downgrade)
Summary
Sea Limited is positioned for strong long-term growth, but recent earnings misses and higher costs are an issue in the near term.
E-commerce and digital finance penetration in SE's target markets is still low and may take longer to improve.
The current valuation appears high at triple-digit multipltes against the sector and investors will have to focus on the next quarter.
Sea Limited (SE) is up more than 170% from my Buy recommendation in 2022, and that follows a 25% downturn from the all-time highs in September. The company has underperformed analysts' expectations in three of the last four quarters, and its valuation is starting to deflate.
Sea Limited's performance underlines strong activity
Sea Limited stock is actually up around 38% for the year and is now down -16% over the last three months. The price rallied 25% following the second-quarter earnings release but retraced to that same level.
The third quarter earnings release this week saw another miss on analysts' expectations by 21.33%, according to Nasdaq data.
The consensus estimate for Q3 release had been 0.75 cents per share, but the company delivered 0.59.
"With e-commerce and digital finance penetration in our markets still low but increasing, strong growth lays the best foundation to maximize our long-term profitability," said CEO Forrest Li. Yet, investors may be concerned about the pace of that penetration, and the stock sold off.
The big problem for the company over the last year has been a surge in expenses, which are up 37% year-over-year.
These costs are the result of the company's expansion efforts, and analysts would've been hoping to see a reduction in the latest quarter.
Looking at the company's annual operations, there is nothing too concerning, as total revenue has been rising in line with the expenses, and profitability is strongly improving. But investors are not happy to pay a growth premium at present as expenses continue to rise.
I believe the recent pullback in the stock may continue before a buying opportunity emerges.
The company's growth drivers and dominance are secure
Bank of America analysts issued a Buy recommendation on Sea one month ago.
Analysts see the company as best-positioned in the market to capitalize on the e-commerce boom in Southeast Asia. BofA sees the dominance of online marketplace Shopee as being key, and the expansion into Brazil/Latin America was going well. They also see potential in gaming and fintech, saying:
"Free Fire is likely to show steady growth led by expansion in emerging markets and future potential collaborations. In Fintech, Sea is expanding offerings from on-Shopee to off-Shopee & secured loans," analyst Sachin Salgaonkar wrote.
Seeking Alpha analysts rate the company a Buy with a rating of 4, while Quant ratings go for Hold, but that appears to be weighed down by valuation.
The valuation issue is slightly deceiving, as the company is higher than the sector by triple digits, but is actually around 50% cheaper than its five-year median level.
An example would be in forward price/sales, where Sea is valued at 3.81x, which is 318% ahead of the sector's 0.91x average. But that figure is -45.74% lower than Sea's five-year average. The sales valuation is actually not too high for a growth stock, but investors are scaling back their assessment of the growth prospects.
Sea's Shoppee e-commerce platform delivered another record-high quarter for Gross Merchandise Volume, after records in Q1 and Q2. GMV grew 25% year-on-year in the first half.
"We now expect Shopee's full-year 2025 GMV growth to be more than 25%," the earnings statement said.
Looking at the company's execution, Sea was able to expand into Brazil and recently celebrated its fifth anniversary in the country, where it is now the leading platform by order volume. That puts the expense increase into perspective when the company can deliver strong success from its efforts.
GAAP revenue in E-Commerce of $4.3 billion was up 34.9%, while Digital Financial delivered $989.9 million, up 60.8% y-o-y. SeaMoney's loan book as of September 30, 2025, was $7.9 billion, up 69.8% year-on-year. A 90-day non-performing loan ratio of around 1.1% was stable over the previous quarter.
Digital Entertainment revenue of $653 million was up 31.2% on the year. The company's Garena gaming division delivered strong momentum in the first nine months of the year, with double-digit growth in multiple titles.
These included Free Fire, Arena of Valor, EA Sports FC Online, and Call of Duty: Mobile. Free Fire now has a huge global player base of more than 100 million average daily active users. The division is looking to try new genres, and AI-driven gaming may improve user acquisition and long-term growth opportunities.
The founder anticipates a 10X valuation with AI progress
Sea's founder, Forrest Li, told employees recently that a trillion-dollar market capitalization is possible, which would be a 10X gain from current levels.
In a memo to staff, Li compared the AI growth with the arrival of the personal computer and smartphone, which boosted consumer access to products and services. "It will require us to make the right calls, execute extremely well, remain well-disciplined, and compete relentlessly. But a tech transition like this makes it possible," he said.
Risks to the Buy thesis
I think I have laid out the strengths for Sea Limited, with a balanced revenue base, strong profitability, and execution. Although the company's valuation is a discount on its five-year historical trends, it is still high compared to the sector.
As the stock continues to drop from its highs this year, institutions could step in and see a discount opportunity. The current momentum may remain in place until the next quarter, where it is possible that the rising costs problem has been fixed.
Conclusion
I think Sea Limited will continue its bearish trend into the next earnings release, but I may buy it before then if the discount is greater. Sea's business is set up for strong growth, with the Shopee e-commerce platform delivering well in overseas markets. The digital finance and gaming divisions are well balanced as a percentage of total revenue, and fast growth in the company's loan operations is a good sign. The AI valuation dream may be further down the line, but the company will need to rein in its expenses, or deliver stronger revenue to see a return to a bullish trend.
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