Sea Ltd (NYSE: SE) stock is down 29% on the results announcement. SE stock fell not because the results are terrible, for they’re not. Rather, the results were less than expected. So, the value that was already encapsulated in the stock price as a result of those expectations vanishes. A reminder of what really determines stock prices that is - it’s what people believe will happen that matters. Another way to make much the same point, the current stock price is the net present value of all future income. So, even a mild change in expected future results has a highly geared effect upon the NPV and thus stock price.
For those who don’t know what Sea Ltd does: “Sea Limited, together with its subsidiaries, engages in the digital entertainment, e-commerce, and digital financial service businesses in Southeast Asia, Latin America, rest of Asia, and internationally. It offers Garena digital entertainment platform for users to access mobile and PC online games, as well as eSports operations. The company also operates Shopee e-commerce platform, a mobile-centric marketplace that provides integrated payment and logistics infrastructure and seller services. In addition, it offers SeaMoney digital financial services to individuals and businesses, including offline and online mobile wallet, and payment processing services~” and so on. Nothing wrong with any of that and indeed there isn’t anything wrong there either. We’re not suddenly thinking that this is another Wirecard or anything.
Sea Ltd stock price from Google Finance
The results were a falling short though: “The Singapore-based company earned a profit of 54 cents per share for the quarter that ended in June on $3.1 billion in revenue. Analysts polled by FactSet, however, were expecting sales of $3.26 billion and earnings per share of 65 cents. In the year-earlier period, Sea lost $1.67 per share on sales of $2.9 billion.” Viewed objectively those results are fine. Hey, a rise in sales, a switch from loss to profit, who wouldn’t be happy with that? Well, investors, obviously. Because people expected better. The Sea Ltd stock price already included the effects of those better results that everyone was expecting. Fall short of expectations - recall, again, the expectations already built into the stock price - and the stock price will fall.
It’s entirely possible that this lower price is a good entry point for anyone thinking of a long term holding here. The reset in expectations might make that true. We’ve no view either way here - our insistence is only in the lesson. Stock prices are based upon expectations of the future - change the expectations and the stock price will change, often vehemently.