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 38.97, recorded a gain of 8.37% in a day and a 3-month decrease of 39.55%. The stock's fair valuation is $176.16, 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 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.
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 1.59. 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.
Interpreting the 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.
Company Overview
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.
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 Sea's seemingly attractive valuation, its low Altman Z-score and declining asset turnover ratio suggest that it may be a potential value trap. This underscores the importance of conducting thorough due diligence before making an investment decision.
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