Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Sea Ltd (SE, Financial). The stock, which is currently priced at 35.37, recorded a loss of 5.76% in a day and a 3-month decrease of 40.51%. The stock's fair valuation is $176.23, as indicated by its GF Value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Potential Value Trap Indicators
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Sea should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.66. These indicators suggest that Sea, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding Altman Z-Score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
About Sea Ltd (SE, Financial)
Sea operates Southeast Asia's largest e-commerce company, Shopee, in terms of gross merchandise value and number of transactions. Sea started as a gaming business, Garena, but in 2015 expanded into e-commerce, which is now the main growth driver. Shopee is a hybrid C2C and B2C marketplace platform operating in eight core markets. Indonesia accounts for 35% of GMV, with the rest split mainly among Taiwan, Vietnam, Thailand, Malaysia, and the Philippines. For Garena, Free Fire was the most downloaded game in January 2022 and accounted for 74% of gaming revenue in 2021. Sea's third business, SeaMoney, provides mostly credit lending.
Sea's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Sea's Altman Z-score reveals Sea's financial health may be weak, suggesting possible financial distress:
Operational Efficiency Indicators
When it comes to operational efficiency, a vital indicator for Sea is its asset turnover. The data: 2021: 0.73; 2022: 0.69; 2023: 0.74 from the past three years suggests a recent decline following an initial increase in this ratio. The asset turnover ratio reflects how effectively a company is using its assets to generate sales. Therefore, a drop in this ratio can signify reduced operational efficiency, potentially due to underutilization of assets or decreased market demand for the company's products or services. This shift in Sea's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion
Despite the attractive valuation of Sea (SE, Financial), the company's low Altman Z-score and declining asset turnover ratio indicate potential financial distress and reduced operational efficiency. These factors suggest that Sea might be a potential value trap, emphasizing the importance of thorough due diligence before making investment decisions.
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