Here is my take on SE current valuation and recent stock price swing: SE current valuation is fair but not great, however, its long-term growth is no doubt promising. I would still buy this great company at fair price. 10 mins read. Thoughts on current valuation Sea limited has three pillars of businesses – DE (digital entertainment), EC (eCommerce), DFC (digital finance). I will use the SOTP (sum of the Part) method to assess its current valuation. Starting from DE, the company’s guidance for 2021 revenue is $4.5B, ~38% YoY growth from $3.2B in 2020. As the only profitable business (cash cow), DE’s historical profit margin was ~55%-60%, therefore, we can assume DE 2021 EBDITA will be in the range of $2.5-2.7B. If apply 16xPE (gaming industry median PE = 18, this is research from Founder Security), the valuation for DE in 2021 will be $40-43B. However, I also found out in 2021 Q1, Nintendo (PE = 17), Avid Technology (PE = 27), and Activision Blizzard (PE = 28), if we take the average of those three which is 24, the valuation could go substantially higher to $60-64B. Moving on to EC, the company’s guidance for 2021 revenue is $4.5B, ~110% YoY growth from $2.2B in 2020. Sea limited eCommerce platform Shopee now ranks as the #1 online shopping platform by MAU and total time in-app on Android and downloads in Southeast Asia and Taiwan for consecutive quarters. By its nature, Shoppe burned tons of cash in the past few years and will continue in the near future. There are two typical valuation methods for a fast-growing eCommerce company – 1. Price to sales and 2. price to GMV. If we use price to sales, the benchmark companies I look at are ETSY (p/s=20), Pinduoduo (p/s=28), Chewy (p/s=6), Shopify (p/s = 46), Mercadolibre (p/s = 18), I then take a median of p/s = 21 for Shopee, then the valuation using price to sales method will be ~$90B. If we use price to GMV instead, unfortunately, Sea didn’t give any GMV guidance in 2021. Rather I need to make my own assumption: Shopee annual GMV is $35B ~113% YoY from 2019, the growth rate will likely continue which will be in line with the 2021 revenue growth rate, then GMV will reach $70B by the year-end. The company easy to compare with is Pinduoduo, Pinduoduo current price to GMV is 0.9, then the valuation using the price to GMV method will be ~$63B, which is almost 30% lower than the price to sales method valuation. But I have to argue that GMV typically uses for e-commerce companies when they first became popular, using GMV as a standalone metric might not present the whole picture. With that said, I prefer price to sales in this case because it represents not only the company’s ability to monetize on transaction-based fees but also paid to advertise for sellers and other value-added services. Last but not least, Sea’s DFC business gained a lot of momentum this year as it is selected for the digital full bank license in Singapore. In 2020, DFC only contributed $61M, but almost x 800% its revenue QoQ from $3.6M in Q4 2019 to $24M in Q4 2020. And now there are 23M paying users, which doubled YoY. This momentum will continue with the integration between Shopee and ShopeePay, and I see huge synergies. Quote from Sea’s Q4 earnings call: “For the fourth quarter, SeaMoney’s mobile wallets recorded total payment volume of 2.9 billion dollars with quarterly paying users surpassing 23.2 million. This was partly driven by monthly paying users in Indonesia which exceeded 10 million during the fourth quarter.....We also see that SeaMoney’s merchant partners increasingly recognize the value of tapping into the vast and rapidly growing user bases of Shopee and SeaMoney’s.” The upside is clear to me since we saw how successful Square and PayPal interrupted the traditional finance industry, how popular Cash App and Venmo among people in the US. Look at how seamlessly people in China use Alipay or WeChat in their daily life. More importantly, Sea is expanding services to merchant partners, which is similar to how Square builds up the seller ecosystem. The merchant side of business seems even more promising to me than the customer side since dollar per user by the transaction in South East Asia is much less than what is in the US and China, while merchant partnership could potentially boost up the top line of DFC business. Unlike the gaming and eCommerce business, however, ShopeePay is still in its infant phase, plus the competition is brutal. The two biggest competitors for ShopeePay are GoPay by Gojek and OvO. And the main battlefield is in Indonesia, where half of ShopeePay’s revenue coming from. ShopeePay was late to the party when GoPay and OvO were the two dominant players. Interestingly, the Google trend indicates ShopeePay has surpassed GoPay in search volume since Nov 2020 and chases really hard behind OvO.' Valuation, on the other side, is tricky considering the revenue is so small and a lot of uncertainties. Therefore, to be conservative, assume DFC revenue could double each year, to $100M by the year 2023, applying 10x p/s would give a valuation of $1B. Of course, people might argue Square is currently valued at $100B and Ant finance was once value at over $300B for IPO, but I want to stay humble and see how Sea management executes their vision to grow DFC business to the next level. So why do I believe Sea limited will prosper in the long term? I could write another article on the booming South East Asia economy, Sea Limited’s great company culture, and phenomenal leadership. But the most important question for investors is that if the investment one dollar today, could it give a fat return in the future. I would love to quote from the book The Perfect Speculator by Brad Koteshwar “many times a stock tops out near its peak earning growth”. I believe Sea limited is far from its peak based on the company’s life cycle. Like human beings, all the businesses in the world have their own life cycle. The graph below shows where Sea limited stands: The DE business has grown to a considerable size and is less likely to keep triple-digit growth in the near term. The EC business will counite with triple digital growth for years given the low eCommerce penetration of South East Asia and will surpass DE revenue by 2022. DFC is still in the launch phase facing brutal competition, it could fail hardly, or it can go for a slam dunk and easily shadows the other two businesses. The current 400% bull run since last year was just a start since the company hasn’t nearly reached its full potentials yet and there is a long way to go. Y2021 SE Fair valuation = DE (40B) + EC (90B) + DFC (1B) = 131B In conclusion, if Sea can continue to keep DE business running as it is, and develop successful gaming titles in the future, continue to expand Shoppe platform in terms of GMV, seller/user base, and ShopeePay has to win big in Indonesia and successfully builds seller ecosystem, then the current fair value should be ~$130B, equals to the stock price of $250. Given the stock price of $220-230 today, we have 15% upside this year. As a long-term investor and proponent of Sea limited since the stock price was $80, I honestly don’t want the stock price to rally too much this year. I wish the company could build up the fundamentals, continue to create value for society, the stock price will eventually follow, and only the most patient investors will get rewards. *Gross merchandise volume is the total sales dollar volume of merchandise transacting through the marketplace in a specific period. It’s the real top line, what the consumer side of the marketplace is spending. It is a useful measure of the size of the marketplace and can be useful as a “current run rate” measure based on annualizing the most recent month or quarter.