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 $39.72, recorded a gain of 6% in a day and a 3-month increase of 7.64%. The stock's fair valuation is $96.71, 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. It is a crucial metric that combines historical trading multiples, an adjustment factor based on past performance, and future business estimates. Ideally, the stock price will oscillate around the GF Value Line, with significant deviations suggesting overvaluation or undervaluation and the potential for future returns accordingly.
However, investors should proceed with caution. Despite Sea's seemingly attractive valuation, risk factors such as a low Altman Z-score of 1.66 indicate that Sea may be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Decoding Financial Health: The Altman Z-Score
Before delving into the details, let's understand the Altman Z-score. This financial model predicts the likelihood of a company facing bankruptcy within two years. A score below 1.8 suggests a high risk of financial distress, while a score above 3 indicates a lower risk. Sea's Z-score of 1.66 is a red flag, signaling potential financial difficulties ahead.
Company Profile
Sea operates Southeast Asia's largest e-commerce company, Shopee, and started as a gaming business, Garena. It has since expanded into e-commerce, which is now the main growth driver. Shopee operates in eight core markets, with Indonesia accounting for 35% of GMV. Garena's 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 credit lending.
Breaking Down Sea's Low Altman Z-Score
An examination of Sea's financial ratios sheds light on its low Altman Z-score. The Retained Earnings to Total Assets ratio has shown a worrying decline in recent years, suggesting Sea's reduced ability to reinvest in its business or manage its debt. Furthermore, the EBIT to Total Assets ratio has dipped, indicating that Sea may not be fully leveraging its assets to generate profits. Lastly, a fluctuating asset turnover ratio points to potential operational inefficiencies, which could be due to asset underutilization or decreased market demand.
Conclusion: The Value Trap Dilemma
Sea's undervaluation according to GF Value might seem like an investment opportunity, but the company's low Altman Z-score and declining financial ratios suggest that it could be a value trap. Investors should exercise due diligence and consider these warning signs before making any investment decisions. For those seeking stocks with high Altman Z-Scores, GuruFocus Premium members can utilize our Walter Schloss Screen.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
