As 2023 was winding down, more and more prominent Wall Street analysts were moving to the sidelines with Sea Limited(NYSE: SE) stock. The company's revenue was barely up 5% during the year, which isn't enough to get the attention of growth investors. Sales for its video game unit were down big. And its e-commerce segment lost a lot of money.
Moreover, analysts were particularly concerned with e-commerce for Sea. It accounted for two-thirds of the company's revenue in 2023, making it undeniably important for the business. But as mentioned, it was unprofitable. And with rising competition, particularly from TikTok, it seemed like its path to growth and profits was unclear.
Analysts don't provide predictions -- they provide opinions. They're well-informed opinions, but they could still be wrong. Nevertheless, a good number of investors follow recommendations from Wall Street without question. And with the analyst community on the sidelines with Sea stock, it seems many investors were unenthused with the company's prospects as well.
I don't think anyone predicted what's happened with Sea stock in 2024. Since the start of the year, it's up more than 130%, absolutely crushing the returns for the S&P 500.
SE Chart
Here's why Sea stock has soared in 2024, and why investors could still see impressive long-term upside even after its strong recent gains.
Why Sea stock is soaring
When it comes to winning stocks, it's impossible to understate the importance of growth. And Sea's growth is turning heads.
The company's video game unit is a disappointment, with revenue dropping by nearly 18% year over year in the second quarter of 2024. But e-commerce revenue was up more than 40%, and financial services revenue was up more than 30%, leading to growth of 23% for the business as a whole.
For perspective, this is Sea's best growth in two years, which is why investors are responding favorably.
SE Operating Revenue (Quarterly YoY Growth) Chart
As mentioned, Sea's best growth is coming from its e-commerce unit, easing fears about competition from TikTok. Regulatory pressures against TikTok provided a window of opportunity for Sea, which the company capitalized on. Management spent nearly $700 million on sales and marketing in Q2 alone for just its e-commerce unit.
Not only is Sea now growing at its fastest pace in a couple of years, it's also turning a profit. Now, some might object, noting that Q2 net income was down 76% year over year to $80 million, which is true. But it was profitable nevertheless. And the dip was largely due to the aggressive marketing spend.
If Sea's management had spent on marketing without any return on investment, then it would be a bigger problem. But considering the marketing paid off with growth, it seems like a smart move.
Regarding the company's stock performance in 2024, it's important to note how low expectations for Sea stock had dropped. Its price-to-sales (P/S) ratio had plunged to less than 2 at the start of the year, which is quite cheap.
In short, investors doubted its growth potential. But as growth has reaccelerated, investor confidence has started to bounce back.
SE PS Ratio Chart
What's next for Sea stock?
With just over $14 billion in trailing-12-month revenue, Sea might seem like a big business. But it does business in Thailand, Singapore, Indonesia, India, China, and more -- many of these are large and growing markets. Moreover, the company has multiple paths for growth, considering it has three distinct business segments (as mentioned, video games, e-commerce, and financial services).
Sea's market cap is just a little more than $50 billion right now. To be clear, it needs to grow at a strong clip for many years. But this market valuation is still low enough to provide investors with upside as it grows. And the company certainly has plenty of runway left and has proven itself capable in the past.
Growth could be lumpy. And it's hard to put a precise number on the upside. But I believe Sea has turned things around, and that the stock can keep going up from here over the long term.
As a final caveat, Sea stock benefited this year from its valuation going up. I wouldn't count on that tailwind in the future. Consequently, investors shouldn't expect the stock to double in value every year. But the business can grow, and it can turn a profit, which will likely lift shares higher from here.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Sea Limited. The Motley Fool has a disclosure policy.
