3 Risks Investors Should Know Before Buying Sea Limited Stock Today

Key Points

• Its Shopee segment continues to face enormous competitive threats.

• The growing fintech business may expose the company to credit risk.

• Investors considering the stock will find that it is no longer cheap.

Sea Limited (NYSE: SE) has quietly regained its footing. After a brutal reset in 2022, the Southeast Asian tech platform -- best known for Shopee, Garena, and its fintech arm Monee -- has made a steady comeback.

It has returned to profitability, sharpened its cost discipline, and shown renewed momentum across all three business segments. Investors have taken notice. The stock has more than doubled from its lows, and optimism is rising again.

But with shares now trading near a multi-year high, it's fair to ask: What could go wrong from here? Here are three key risks worth keeping in mind before buying Sea Limited stock today.

Image source: Getty Images.

E-commerce competition is intensifying

Shopee has been Sea's most valuable asset -- and for good reason. It commands more than 50% of market share in several Southeast Asian countries and has built a defensible ecosystem of merchants and users, and a growing range of products and services.

But that leadership position isn't guaranteed going forward, especially with the ever-growing competitive landscape. Topping the list of competitors is TikTok Shop, which is gaining traction rapidly, especially among Gen Z users and video-first sellers. Its mix of entertainment and commerce creates a new shopping behavior that Shopee doesn't fully replicate.

Lazada, backed by Alibaba, is working to regain lost ground in Southeast Asia. With deep resources in logistics, supply chain, and technology, it remains a serious contender. Moreover, it has access to the parent group's huge resources -- in supply chain, logistics, and the latest AI technology -- giving it the necessary firepower to remain in this race for the foreseeable future.

Add to that a growing list of regional and cross-border challengers: Tokopedia, Temu, Shein, and even Amazon in Singapore -- all capable players. While these companies are not as big a threat compared to Lazada or TikTok Shop, they are all successful contenders in their own right, which Shopee cannot ignore.

The silver lining is that Shopee still leads by a wide margin and can leverage its local know-how, economies of scale, and its captive logistics services to defend its turf. Still, the cost of defending that lead may rise. Shopee may need to reinvest more aggressively in logistics, promotions, and ecosystem enhancements -- moves that could pressure short-term margins and slow take-rate growth.

The question is not whether Shopee will lose its lead but how much margin it might have to give up to keep it.

Keep an eye on credit risk

Sea's fintech business -- recently rebranded as Monee -- has emerged as a strong profit contributor to the group thanks to its ever-growing user base and services. Particularly, its credit products have seen enormous demand from users. It now has over 28 million active borrowers and a $5.8 billion loan book, making it one of the leading digital lenders in the region.

To put it into perspective, Monee posted $787 million in revenue, up 58% year over year, in the first quarter. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) reached $241 million, up 62% year over year, and the 90-day non-performing loans (NPL) ratio remained low at 1.1%.

But lending, especially in developing markets, comes with its own set of risks. Monee has grown rapidly by serving digital borrowers, many of whom are first-time borrowers lacking formal credit histories. Serving this new cohort expands the market, but it also increases exposure to potential problems down the road. So, while NPL may look stable now, macroeconomic volatility, regulatory changes, or borrower fatigue could quickly change that status.

Besides, digital-lending regulations are also tightening across Southeast Asia. Governments are increasingly focused on data use, interest rate caps, and ethical collections -- all of which could slow growth or increase compliance costs. The same thing happened in China a few years ago, which eventually halted Ant Group's initial public offering (IPO).

In short, Monee is no longer just an e-wallet play. It's a full-scale lender. Investors will need to monitor it as such.

The valuation is no longer a steal

After falling to below $40 in late 2023, Sea Limited stock has rebounded sharply -- and now trades at close to $150. While still far below its 2021 highs of above $350, it's safe to say the "deep value" phase is behind Sea.

The stock currently trades at price-to-sales (P/S) and price-to-earnings (P/E) ratios of 5.3 and 106, respectively. Granted, the company is enjoying 20%-plus revenue growth and rising margins. But that also leaves little room for error.

The market is no longer pricing Sea as a broken growth story. A softer-than-expected quarter, a spike in credit losses, or a misfire in competitive defense could trigger a meaningful pullback.

What it means for investors?

Sea has done the hard part. It's returned to profitability, found operating discipline, and built three complementary businesses with clear monetization potential.

But the market has taken note. The easy gains are likely behind Sea. Investors thinking of buying the stock at current prices will need to be prepared as the company faces growing competitive threats, credit exposure, and potential stock-price correction.

It's likely going to be a bumpy ride ahead.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lawrence Nga has positions in Alibaba Group and Sea Limited. The Motley Fool has positions in and recommends Amazon and Sea Limited. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.