There is one company which had created quite a buzz when from the Pandemic lows, it had shot up > 8X in just over 1.5 years. Portfolios containing Sea had surged in an unprecedented manner. A quick YouTube search would throw up a record number of bullish videos recommending the company. Many investors felt that the returns were well justified considering the blistering revenue growth that Sea Ltd posted. I never got to research the business but have always been curious, so recently I decided to take a quick look. Here is what I uncovered …
Attached is a snapshot of Sea’s revenue growth. From 2014 to 2021, total revenues grew from ~$161M to a whopping ~$10B translating into a compounded rate of 80%. Blistering indeed! They seem to be firing on all cylinders, planting their flag in country after country. Investors wasted no time in coming up with the monikers ‘Amazon of South East Asia’ and ‘Mercadolibre Killer” (when they entered South America).
However, most investors who had jumped onto the Sea bandwagon, missed one very crucial reality of growth investing (or rather any investing). The long term returns of an investor, cannot be too different from the Return on Capital the underlying business generates. In case of Sea, it’s difficult to calculate ‘Return on Capital’ as it does not generate a profit yet…however what we can definitely calculate is the ‘denominator’ of that Return: ‘Capital Employed’ in the business and see how that has changed over the years. To deliver the 80% CAGR in Revenue Growth, Sea needed an eye-popping 107% CAGR in Capital growth. In other words, during the period when the Revenues grew 62 times, the Capital the business needed to guzzle grew 163 times.
Here is an apples-to-apples comparison with Amazon. In 1997, Amazon had revenue ($148M) of the levels similar to what Sea had in 2014 … while it took 7 years for Sea to grow revenues to ~$10B level (just shy of the mark), it had taken 9 years (2006) for Amazon to cross the $10B mark…but in comparison to the 163X growth in Capital for Sea, in case of Amazon it was just 17X. In other words Amazon needed only ~$1.8B in capital to cross the $10B revenue mark as compared to ~$11.6B for Sea.
So NO! Sea is by no stretch of imagination an ‘Amazon’. It can be a decent business, but it is no where is the ‘Amazon’ class. Novice investors often miss this very important aspect of business analysis..it is easy to get carried away by ‘growth’ figures, but it takes a bit of knowledge of first principles and understanding of how compounding works, to be able to focus on the ‘Capital’ required for the growth.
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