With high inflation rates, and the increase in interest rates around the world, growth stocks have struggled throughout 2022. But in the past Warren Buffett has advised that investors should “be fearful when others are greedy, and greedy when others are fearful”. I think this quote applies nicely to growth stocks now, especially those with solid fundamentals and quality. The e-commerce and digital entertainment company, Sea Limited (NYSE: SE), is one of my personal favourites.
The recent results
The company’s recent 2021 results were a bit of a mixed bag. In many ways, the excellent growth of the business continued. For example, total Q4 revenue was $3.2bn, which was a year-on-year increase of 105%. This also enabled full-year revenue to reach $10bn, a 127% year-on-year increase. This represents outstanding growth, which is far ahead of the majority of other growth stocks.
Nonetheless, there were also some slightly worrying signs that growth may be slowing. For example, the e-commerce segment, called Shopee, saw revenue growth of ‘only’ around 90%, far less than previous quarters. The digital entertainment sector is also likely to see a slowdown for a couple of reasons. Firstly, there has been a recent moderation in online activities and fluctuations in engagement. Secondly, the company’s flagship app, Free Fire, has been banned in India. This is due to security concerns revolving around the company’s links to China.
Due to its investment in the e-commerce segment, the company is also seeing widening losses. For example, in 2021, adjusted EBITDA was a loss of $593m. There are also no signs of the group reaching profitability any time soon, despite the fact that the digital entertainment sector is consistently reporting positive EBITDA. This is because free cash flow is being invested into the e-commerce segment, which is expanding around the world. While this is helping drive the excellent revenue growth, such large losses still pose a major risk.
Why would I still buy this growth stock?
Despite the risks, I still feel that Sea Ltd is a no-brainer buy. For instance, after its recent dip, it trades on a price-to-sales ratio of under 7. For a growth stock, especially one seeing rates of growth like this, it feels incredibly cheap. This is why I think it would fit the bill as a Warren Buffett-type stock.
Further, I think worries about the digital entertainment sector have been overdone. And after Tencent, which is a major Chinese company, got rid of its Class B voting shares (that gave it special rights), Sea Ltd’s links to China are far more limited than it may have seemed. Therefore, I believe that the ban in India may be overturned. This would have a positive impact on the Sea Ltd share price.
Finally, I am excited by Shopee. The e-commerce segment has been growing at rapid rates and has already expanded in Southeast Asia, Europe and most recently, Latin America. In many of these markets, e-commerce has still not fulfilled its potential, meaning that there’s significant scope for sales to rise. Therefore, I’ll continue to buy Sea Ltd shares while there’s fear in the market.