Buying This Magnificent Stock at $74 Could Be Like Buying Amazon in 2016

Amazon (AMZN 0.58%) was founded in 1994 to sell products using the Internet. Since then, it has become the dominant player in the e-commerce industry. However, the company has also expanded into other areas, such as cloud computing, streaming, and digital advertising.

Shares of Amazon have climbed more than fivefold since 2016, and while e-commerce remains the company’s largest source of revenue, its other businesses have played a notable role in that value creation.

Sea Limited (SE 3.25%) is on a similar path to Amazon, although at a much earlier stage. E-commerce is the company’s core segment, but it’s also finding success in other areas of the digital economy, such as gaming and financial services.

Sea trades at about $74 per share as of this writing (valuing the company at $42.4 billion), but I think it has the potential to soar fivefold in the coming years. So, investors who missed out on Amazon might want to grab this opportunity with both hands.

A triple threat in the digital economy

Amazon was an early mover in e-commerce in the U.S. and Europe. Sea is based in Singapore and focuses on serving Southeast Asian markets, which are at an earlier stage in the digital transition compared to the U.S. It owns a hybrid consumer-to-consumer and business-to-consumer marketplace called Shopee, which is the source of most of its e-commerce revenue.

Like Amazon, Sea is currently focused on optimizing Shopee’s logistics network (SPX Express) through automation and operational improvements to deliver products more quickly and bring down costs. During the first quarter of 2024, 70% of Shopee orders were delivered within three days, and its cost per order fell 15% across Asia. According to Amazon, faster delivery times encourage consumers to order more frequently because they grow more confident in receiving products within a predictable timeframe.

Sea’s digital financial services segment is headlined by SeaMoney, and it’s another important driver of Shopee’s success. Not only does it offer digital bank accounts and consumer loans (including the buy now, pay later variety), but it also lends money to Shopee merchants to accelerate their growth. At the end of Q1, SeaMoney had $3.3 billion in total loans on its books, up 28.7% year over year, signaling strong demand.

Sea also owns Garena, a leading game development studio responsible for global smash-hits like Free Fire and Call of Duty: Mobile. It experienced a consistent decline in users after 2021 when pandemic-related lockdowns and social restrictions ended. But the segment stabilized throughout 2023, and in Q1 2024, Garena reported 594.7 million quarterly active users, up 21% year over year.

The strong result was driven by a 24% increase in monthly active users on Free Fire, the most downloaded mobile game in the world last quarter.

Sea’s growth just accelerated in a big way

Sea is coming off a challenging couple of years. Its business lost momentum when global interest rates began to soar in 2022 because consumers suddenly found themselves with less money in their pockets. As a result, the company aggressively cut costs in 2023, placing further pressure on its revenue growth, which came in at just 4.9% for the year, a substantial deceleration from the triple-digit growth rates it delivered previously.

But Sea has opened 2024 on much better footing. Its digital entertainment segment remained a laggard with revenue shrinking 15.1% year over year despite the increase in users. However, its e-commerce business — which is responsible for the majority of the company’s total revenue — generated solid growth of 32.9%. Sea’s digital financial services segment also made a positive contribution, up 21.0%.

Overall, Sea increased total revenue 22.8% to $3.7 billion. That growth rate was more than four times faster than its 2023 growth rate.

There is one glaring reason for the strong top-line result: Sea increased its Q1 marketing spending a whopping 92.3% year over year. And despite continuing to trim all its other costs, that was enough to lift its total operating expenses 14.8% higher.

That did create a small problem, though. Sea generated net income (profit) of $162.6 million in 2023, a huge improvement over its eye-watering $1.6 billion loss in 2022. In other words, its cost cuts had the desired effect. But by increasing its operating expenses in Q1 2024, its bottom line sank back into the red to the tune of $23 million.

That’s a tiny loss on such a large amount of revenue, and Sea has $8.6 billion in cash, equivalents, and short-term investments on hand, so it can certainly afford it. But it’s something investors should monitor because it would be great to see accelerating revenue growth while also maintaining profitability.

Why Sea stock could soar fivefold over the long-term

As I mentioned, Sea is valued at $42.4 billion. Based on the company’s trailing-12-month revenue of $13.7 billion, its stock trades at a price-to-sales (P/S) ratio of 3.1. That’s near the cheapest level since Sea became a public company in 2017, and it’s substantially below its peak P/S ratio of 22.9.

That peak valuation was unsustainable, not to mention a little irrational, because it was based on the premise that Sea would continue growing its revenue at triple-digit rates (as it did from 2019 to 2021) for the long term. However, Sea doesn’t have to grow that quickly for its stock to deliver a great return for investors.

If Sea can increase its annual revenue at a compound annual rate of 17.5% for the next 10 years, its top line will reach about $68.7 billion by 2034. At its current P/S ratio, that would value the company at $199.2 billion, which implies a fivefold return from here.

We know Sea’s revenue growth accelerated to 22.8% in Q1, so it’s already performing above the threshold. Plus, I think there is scope for its P/S ratio to tick higher if that growth continues, providing even more potential upside to the stock. Amazon’s P/S ratio, for example, has doubled since late 2022, thanks to the company’s accelerating revenue growth, so there is precedent.

Therefore, investors who missed out on buying Amazon stock in 2016 — right before it soared fivefold — might find a comparable opportunity in Sea right now.