Here’s a Tech Bubble That Makes Tesla Look Cheap

(Bloomberg Opinion) -- Sea Ltd. is one of those companies you either know, or you've never heard of. And investors the world over will be kicking themselves for missing the massive run-up in its stock. 

But don't feel sorry for sitting on the sidelines even while shares in the Southeast Asia internet company climbed 395% last year. That's because the surge is largely illogical. As Yoolim Lee of Bloomberg News points out, it's the second-best performer among $100 billion-plus stocks, behind only Tesla Inc. Sea is now worth around 29-times its 2020 revenue, and 16-times that for estimated sales this year. By comparison, Tesla's metrics stand at around 21-times and 14-times, respectively.

Sea's fourth-quarter and full-year results, reported late Tuesday, highlight the lofty expectations that come of its $128 billion market cap. Yet the internet company hasn't reported a single quarter of profit in the past two years, compared with six at the carmaker. In fact, Sea hasn't ever been profitable and analysts don't expect it will become so within the next two years.

As is generally the case with big bets on chronically unprofitable businesses, investors seem to believe that top-line growth puts Sea on a trajectory toward levels of income that justify the heady valuations. Skepticism is warranted.

At the moment, the company has two major divisions: entertainment and e-commerce. It has a third sector called digital financial services that mostly revolves around payments services aligned with its online retail business.

E-commerce is the engine of growth, with revenue there doubling in the most recent quarter and last year. Yet it's still unprofitable not only because logistics and other costs are climbing, but because the company continues to spend a lot in marketing just to drive the top line. 

On the other hand its solidly profitable division is entertainment. Though growth here is slower, at a still respectable 77.5%, it has been consistently in the black and continues to prop up the entire company. My concern here is Sea's high dependence on one title, Free Fire — an online shooter game.

According to Sea, Free Fire was the most downloaded mobile game globally last year — the second consecutive time it has had that honor. While this is a truly impressive feat, investors need to be pondering how much longer the company can milk it before consumers get tired and move on. To be sure, Sea is hard at work developing other games, some of which will find various levels of acceptance among gamers, but such success isn't guaranteed. 

That last division — financial services — could be the swing factor. Right now it's burning money. But the bet is that it can be akin to Ant Group Co.'s Alipay or Tencent Holdings Ltd.'s WeChat Pay. Sea may just be able to turn its offering into a popular payments platform, but there's plenty of competition around the corner with names like Gojek, Grab and even Line all in the mix. Should Sea's digital financial division manage to hold market share, it may do so at the expense of margins, possibly as a loss-leader.

Investors wanting to bet on the future of Southeast Asia's digital growth have many reasons to believe in Sea. But faith alone won't justify those sky high valuations forever.

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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