Here’s Why Farrer Wealth Advisors Believe that Sea (SE)’s Future is “Still Bright”

Farrer Wealth Advisors, an investment management firm, published its “Farrer Wealth Managed Solution” first quarter 2022 investor letter – a copy of which can be downloaded here. This quarter was tough on the managed solution, and while the fund always expected its portfolio would suffer 30%+ drawdowns at some stage, they never thought it would be in the first nine months of launching. The benchmark bottomed on 8th March, and since then has returned 8.90% whereas our Managed Solution has returned 15.67% (the below in USD; 8th March to 1st April 2022). Try to spend some time taking a look at the fund’s top 5 holdings to be informed about their best picks for 2022.

In its Q1 2022 investor letter, Farrer Wealth Advisors mentioned Sea Limited (NYSE:SE) and explained its insights for the company. Founded in 2009, Sea Limited (NYSE:SE)  is a Singapore-based global consumer internet company with a $46.0 billion market capitalization. Sea Limited (NYSE:SE)  delivered a -63.11% return since the beginning of the year, while its 12-month returns are up by -67.87%. The stock closed at $82.52 per share on April 27, 2022.

Here is what Farrer Wealth Advisors has to say about Sea Limited (NYSE:SE) in its Q1 2022 investor letter:

Sea Limited had been selling off since its peak in early November of ~$363/share. This was driven by both a general sell off in tech, especially non-profitable tech, and a general belief that its gaming arm (Garena) was experiencing a slowdown due to its flagship game Free Fire. Free Fire has experienced a slowdown for three reasons: it is a victim of its own success, and by the end of Q321, nearly 10% of the world’s population already played the game, and thus reaching new users was difficult; A return to normal with people traveling/going out more and spending less time playing games; and the Indian market imposed a ban on the game due to anti-Chinese sentiment (Tencent is a large shareholder in Sea). We believed that these issues, while worth considering, were a bit overblown, and some of the data we saw from 3rd party sources showed that though Free Fire usage was dipping, it wasn’t too drastic. Thus, we marginally added to the position throughout the quarter. This was a mistake. During Sea’s earnings report in early March, the company guidance for Garena (down nearly 35% yoy) showed that the slowdown was far worse than predicted. Secondly, Shopee (Sea’s ecommerce arm) has pulled out of certain markets (in Europe and India), which long-term is probably the right strategy, but short-term hampers the optionality of the business. After considering this information and the guidance from earnings, we decided to significantly trim the position. In our opinion, management does have a bit of egg on its face from an overly aggressive expansion or as one investor called it, “bull market hubris.” We think management’s moves were mostly logical, it’s just that their failures came during an unforgiving market. While we believe that Sea’s future is still bright (especially with regards to their e-commerce and financial services), it will take a few quarters of strong earnings for them to regain their momentum, and for now the capital can be better spent elsewhere.”

Our calculations show that Sea Limited (NYSE:SE) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Sea Limited (NYSE:SE) was in 108 hedge fund portfolios at the end of the fourth quarter of 2021, compared to 117 funds in the previous quarter. Sea Limited (NYSE:SE) delivered a -35.67% return in the past 3 months.

Earlier this month, we also shared another hedge fund’s views on Sea Limited (NYSE:SE) in another article. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q1 page.

Disclosure: None. This article is originally published at Insider Monkey.