Cabot Pick “Like Tesla in 2011” from the “Switzerland of Asia”

What's the "Blue Ocean Growth" Stock teased as a current pick of Cabot Stock of the Week?

By Travis Johnson, Stock Gumshoe, November 4, 2020

The folks at Cabot are so often enthusiastic about great growth companies, often picking them and re-picking them as they soar higher, that they sometimes remind me of David Gardner and his Motley Fool Rule Breakers… and given their yen for growth, I imagine both are probably doing great this year with the explosion in cloud, SaaS and “pandemic” tech stocks.

The latest Cabot pitch is for that Cabot Stock of the Week service ($997/yr), which is kind of a “greatest hits” newsletter — publisher Timothy Lutts picks his favorite idea from among Cabot’s stock advisory services each week, so they’re presumably mostly “growth” ideas, given Cabot’s quantitative bent, but they do also have a few dividend and value-focused newsletters… so there ought be some variety.

This time, though, it’s all growth on the docket — they say that this “blue ocean growth stock” is already up 708% and has “plenty of room to grow.” So what is it? Can we get you an answer for something a bit more free-ish than $997?

Here are our clues from the email:

“One secret to this New-York-Stock-Exchange-listed company’s stunning success in becoming the most valuable company listed in high-quality Singapore is the background of its three founders.

“They are all now billionaires.

“Two of the three founders came to Singapore for an elite education, and two also hold degrees from prestigious American universities.

“These young entrepreneurs were also lucky to focus on and then dominate three key high growth markets in Southeast Asia – a market with 650 million people.

“The company’s stock has tripled in 2020, after surging 255% in 2019.”

OK, so if it’s had growth like that we’ll probably at least have heard of it, no? What other clues do we get? More from the pitch…

“There are three powerful engines propelling this company and stock.

“One market is gaming, another is digital payments, and the third is an E-commerce platform that is growing revenue much faster than Amazon with orders of more than 2 million a day.

“Revenue is growing at a rate of more than 100% because it is targeting some of the fastest-growing markets in the world. It’s ecommerce sales have grown exponentially from $47 million in sales in 2017 to $823 million last year.”

Ah, so now that’s starting to sound a bit more familiar. You might be ready with some guesses now, too, I imagine… but let’s check one or two other clues just to be sure:

“A leading conglomerate owns 30% of and has a strategic partnership with this company.”

Mmm hmmm, that tracks too. More?

“It has $2.6 billion is cash and only $1.3 billion of long-term debt.

“The company is expanding into India, which has a population of 1.3 billion people but only 10% of this company’s customers are from India.”

OK, fine, we can’t put off our answer any longer — this is indeed Sea Ltd. (SE), the wild growth story that’s trying to become the MercadoLibre/Tencent/Shopify/Paypal of Southeast Asia. And, of course, most growth or technology investors will probably have heard of this one by now, it has emerged from almost nowhere to become an $80 billion company this year, riding the same gaming and e-commerce waves that have propelled so many tech stocks during the coronavirus… but with a little rocket fuel added in because they’re also a leader in one of the fastest growing parts of the world. And yes, thanks to that surging stock price, Sea is now the largest company in Singapore by market capitalization… though it doesn’t have a listing on the Singapore Stock Exchange (it only trades in NY).

And they report their earnings in a couple weeks, on November 17, so things could get shaken up in a hurry if that report is suprisingly good or bad, but this is a stock I’ve been following pretty closely all year, particularly after buying shares for the first time back in May, so I can at least share with you the last update I noted for the Irregulars:

Here’s what I wrote after their last earnings report, on August 21 (the stock was in the $140-150 range at the time):

8/21: Sea Ltd. (SE) posted another of the wild COVID-fueled earnings reports that we’re now all quite accustomed to seeing — online activity soared in Southeast Asia just like it did in the rest of the world, and their revenue grew by more than 100%, year over year, with strength from both their profitable gaming business and their unprofitable e-commerce platform Shopee, which you might think of as sort of like Shopify for that region of the world.

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The gaming division, Garena, is their cash-flow generator, thanks mostly to their Free Fire game, which is wildly popular in Latin America and Southeast Asia… and Free Fire keeps growing, as it did before the pandemic — they set new records for usage and paid users in July, after being the most-downloaded game of its kind last year and setting new records for mobile use, YouTube views, and other metrics.

Shopee is in a competitive business, with Alibaba’s partner Lazada a strong competitor — the two are in a bit of a market share war, which is probably a big reason why Sea is losing so much money on that business. And it’s not just Lazada, others are also quite aware that ecommerce and fintech offer big potential in that part of the world… but Shopee has a strong partner, too, in Tencent, and they continue to lead the market share battle in a lot of the biggest markets (like Indonesia and Taiwan).

The company overall remains extremely unprofitable because of the cost of pushing Shopee’s growth, but they’re in huge markets and the consistently ludicrous revenue growth remains very tempting — and while it has been boosted by COVID shutdowns, I’m sure, that growth has also been in place for a long time — they’ve grown revenue by more than 100% year over year almost every quarter for the past two years. At that pace, even a free-spending company can grow into their valuation pretty quickly.

I would expect them to keep raising equity as the valuation gets richer, much like other fast-growing companies have done (Shopify, etc.), since they clearly see plenty of growth potential in the future and don’t want to take their foot off the gas — but they don’t actually have a need for cash just yet, so I don’t know when that might come. Right now, their profitable business, Garena (gaming and esports) is growing dramatically enough that their cash flow, mostly from Free Fire, is making up for most of the investments they’re making in Shopee.

The overriding risk right now is not really Shopee, which is doing great but costing them a lot as they invest in expansion, the risk is that Free Fire could lose popularity and the Garena division could stop gushing cash, which would make spending on Shopee and other ventures harder. They still have plenty of cash for now, but hit-driven businesses that are overwhelmingly dependent on a single hit, whether that’s a video game or a pharmaceutical product or a sitcom series, are riskier than those whose cash flow is more diversified.

My SE position is still quite small, I’ve added to it a couple times, mostly fueled by taking profits on my options speculations in this same stock, but I have not