Sea’s Pandemic Surge Is Currency for Some Bold M&A

(Bloomberg Opinion) -- A doubling of revenue coupled with a 263% surge in Sea Ltd.’s shares aren’t enough to make the Southeast Asian internet company profitable, but they do provide something almost as important: opportunity.

Investors seem besotted with Sea, propelling it to a $69 billion market value despite its net loss widening 41% from a year earlier in the second quarter. Analysts, overwhelmingly bullish with 14 buy ratings to two sell calls, don’t even expect the games and e-commerce company to post net income this year or next.

Once known as Garena, Singapore-based Sea gets 44% of sales from digital entertainment such as online games and 41% from e-commerce and other services. The rest comes from direct sales of products. Those have proven to be great businesses to be in during a pandemic when customers are cooped up at home bored, hungry and in desire of some retail therapy. 

It doesn’t matter whether I believe Sea is worth as much as Target Corp., Square Inc. or even Airbus SE — investors do. And that means others probably have the same confidence.

Sea’s stock price gives it a valuable currency. Management could seize this moment to undertake some strategic acquisitions and plug possible holes in its product offering. It can use its market value to do share deals, or sell equity or convertibles to fund them.

Among the areas to explore is logistics. Chinese e-commerce giants Alibaba Group Holding Ltd. and JD.com Inc. saw the value of investing in their own logistics supply chain. Both now view that as a competitive advantage.

Sea might do well to follow the same path. Revenue from its e-commerce business climbed 120% from a year earlier, and 37% from the prior quarter, driven by pandemic demand. Importantly, its take rate — the amount Sea receives from each dollar of orders — expanded 1.8 percentage points to 6.4%. Admittedly, that boost was fueled in part by a 73% increase in sales and marketing expenses.

This momentum, if sustainable, could justify taking a punt on logistics through a joint venture, minority stake, outright acquisition or even building from scratch. Management declined to answer multiple questions about M&A in a conference call Tuesday night.

Sea’s success in games, and the huge potential for growth as Southeast Asia’s high-speed mobile penetration expands with a 5G rollout, makes the purchase of games studios another worthwhile bet. Tencent Holdings Ltd., a backer of Sea, deployed that strategy well with investments in Supercell Oy and Riot Games Inc. The upside of owning your own titles is twofold: taking a greater cut of revenue, and being able to license them to external parties (the risk is developing games that flop and lose money).

Finally, there’s payments, a new area for which Sea has great hopes. This is fast becoming a crowded field, with both Gojek and Grab Holdings Inc. keen to stake out their own territory. Ant Group’s pending Hong Kong listing, with a possible $150 billion valuation, is all the incentive Sea needs to take this business seriously. 

It could face a brutal battle against some well-funded competitors, but investors’ love for the stock and its New York listing could be just the leverage Sea needs to buy out local partners or sign deals that give it an edge.

The best thing Sea can do is grab the advantage offered by the run-up in its stock and double down. Fortune favors the brave — and those with a fortune.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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