Even as the coronavirus pushes the global economy closer to a recession, Sea Ltd continues to trade at 56% higher than prices in October last year. We analyze the Sea's capital allocation between Garena and Shopee.
Garena has consistently performed stronger than Shopee for these reasons:
• The sales and marketing cost per dollar of revenue for Garena is ten cents compared to ninety-three cents for Shopee. Furthermore, Shopee's gross margin is becoming increasingly negative based on adjusted revenue and cost of goods.
• Garena’s total sales and marketing expenses in the last three years was US$177m, 1/8th of Shopee's expense of US$1,368m, while generating more growth and profitability for Sea.
We worry that the Company has been over-allocating resources to Shopee, preventing Garena from reaching its full potential. While we believe that Sea has been very successful these past months, it’s time to sell while its valuation is bullish ahead of the potential economic downturn.