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Robert Abbott
Robert Abbott
Articles (882)  | Author's Website |

The Rocket in Frank Sands' Portfolio

Will Sea become another FAANG or Tencent stock?

According to the GuruFocus scoreboard, Frank Sands (Trades, Portfolio) of Sands Capital Management ranks second among the gurus followed in terms of capital gains achieved over the past 10 years. He follows only David Tepper (Trades, Portfolio) of Appaloosa Management.

Sands' firm has averaged capital gains of 16.50% per year over the decade that began mid-November 2010. That takes in many different market and economic conditions.

In part, that performance may reflect the fact that his portfolio includes four of the FAANG stocks in its top 12 holdings: Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet/Google (NASDAQ:GOOG). The only one of the five not represented in this group is Apple (NASDAQ:AAPL).

But the real rocket in Sands' holdings, in my opinion, is a relative unknown - Sea Ltd (NYSE:SE). Sea is an $86.92 billion company that is held by 13 gurus. Sands has by far the largest holding in it with 25.68 million shares, good for a 5.27% stake in Sea and representing 8.56% of Sands' assets.

Based in Singapore and registered in the Cayman Islands, the firm was founded as Garena Interactive Holding Limited in 2009. It changed its name in 2017 when it listed as an ADS (American Depository Share) on the New York Stock Exchange.

This excerpt from its 2019 annual report outlines its birth and subsequent growth:

"We began our digital entertainment business at our inception in May 2009, and by 2019, we had expanded our local game operations to cover Indonesia, Taiwan, Vietnam, Thailand, the Philippines, Malaysia, Singapore and Latin America. Our self-developed game Free Fire is also currently available in more than 130 markets globally.

"We launched our e-commerce platform, Shopee, in Indonesia, Taiwan, Vietnam, Thailand, the Philippines, Malaysia and Singapore in June and early July 2015, and in Brazil in the fourth quarter of 2019.

"We launched our digital financial services platform in Vietnam in April 2014 and in Thailand in June 2014. In the fourth quarter of 2019, we introduced SeaMoney as the overall brand for our digital financial services business."

Overall, it offers an integrated platform of digital entertainment, e-commerce and digital financial services. Each of the services is localized in its seven core markets in Southeast Asia and Taiwan. Those markets take in 600 million people and had a GDP of $3.6 trillion in 2019.

More recently, Sea has established a presence in Latin America (including the Caribbean) and India. In all the regions it serves it sees growing GDP and a thirst for more online services.

And the company appears to have made the most of its opportunities. It reported 134% year-over-year growth in its total adjusted revenue in 2019. It also grew its profitability quite dramatically:

Sea gross profit growth

Such growth has helped push up its share price:

Sea price chart

On March 20 of this year, the share price bottomed out at $38.00, and on Nov. 16 it closed at $178.22. That's an approximately 4.68-fold increase, making Sands and other managers look very good.

But, aside from recent capital gains, is there any reason to own Sea? You wouldn't buy it for its fundamentals. The GuruFocus system gives it only 4 out of 10 for financial strength and 3 out of 10 for profitability.

Regarding financial strength, the company significantly increased its debt in 2019, but it also increased its cash position:

Sea cash and debt

It does not pay a dividend and its share buyback ratio over the past three years has been negative.

What it does have, though, is robust growth on the top and bottom lines; as it noted in its 2019 annual report, "We have achieved significant scale and growth since our founding. Our total revenue increased from US$414.2 million in 2017 to US$2,175.4 million in 2019, a CAGR of 129.2%."

Such growth pushes up the share price, and that leads to above-average capital gains for investors. To keep the growth coming, Sea will need adequate free cash flow it can channel into new and larger enterprises. In 2019, it appears to have turned around its free cash flow results:

Sea Ltd free cash flow chart

In reviewing its annual report, several issues reminiscent of the FAANG stocks pop up. For example, it reports, "Our businesses enjoy network effects, virtuous cycles and synergies across our platforms."

Network effects refers to the idea that as platforms grow, the experience improves. For example, game players like platforms with many other players, so each time a new player joins it increases the value to all players.

Referring to virtuous cycles, it gave this example:

"As the number of buyers on our Shopee platform increases, Shopee attracts an increasing number of sellers, resulting in increases in the volume and variety of products available on the platform, which increases the purchasing opportunities for each of those buyers. This results in greater monetization potential as the size of each platform grows."

Regarding synergies, it is referring to interactions across platforms. For example, when game players or Shopee buyers use its e-wallet services, the number e-wallet users increases, attracting more merchants to join the network.

Given these similarities with the business models of the FAANGs, could we expect the stock to behave like a FAANG itself, or as some observers are asking, could it become another Tencent Holdings? Incidentally, Tencent has held significant positions in Sea, both before and after its IPO in 2017.

Conclusion

A good year or two does not make another Amazon or Apple; however, it's possible Sea may have that opportunity, in my view. Frank Sands (Trades, Portfolio) and a dozen other gurus may have bought with that possibility in mind.

I think most investors will want to watch for another year or two. That will give them time to see how well Sea performs in Latin America and India, which are relatively new markets. Can the company reproduce—and multiply—its results from Southeast Asia, or will it be dragged down by trying to apply what it has learned in one geographic and cultural region to other regions?

This is a stock for growth investors and only growth investors. No dividend means no interest among income investors. Value investors will not find a margin or safety here, considering the price-book ratio is over 100.

Disclosure: I do not own shares in any of the companies named in this article.

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website


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