When you read the description of this company, it really checks a lot of the hot buttons in the market. Fintech. eSports. E-commerce. Digital payments. You really couldn't ask for more under one roof. Indeed, Jim "Rev Shark" DePorre discusses this stock frequently here on Real Money.
The company is Sea Limited (SE) .
It's no surprise to see a company losing nearly $1 billion soar to a $10 billion valuation in quick fashion. The shares have advanced by more than 100% year-to-date, so it should be no surprise Sea Ltd. raised $1.5 billion at $22.50 per share less than three weeks ago.
Management wisely took advantage of the huge pop in the stock post-February earnings. While it is true the company is losing money, revenue did surpass $1 billion for the full year 2018 and the growth is impressive. Sea is projecting its digital entertainment business to increase 81.5% to 96.7% year-over-year and its e-commerce unit to rise approximately 120%. Overall, total revenue will rise from just over $1 billion in 2018 to nearly $2 billion in 2019.
Unfortunately, costs have been accelerated by twice the rate of growth as the company scales plus begins self-developing games. This should begin to trend down as the company scales, but losses for 2019 will still be nine figures; hence the need for a capital raise. With that raise, there's no near term concern of the company running low on funds nor would I expect another share issuance without another leg higher in price.
This is one I'm interested in owning, but the current chart is a bit precarious. After the recent run, SE has been consolidating between $23 and $24.50, forming what should be a bullish flag. For that to trigger, the stock would need to close above $25. A close below $22.90 has the opposite impact. The bull flag would've failed and the stock would be at risk of a pullback.
I view $21 as the first level of support with $18 as a second level. I don't believe we'll see the gap filled in the next two months, but we could see the top tested and I'd be willing to own the stock at those levels. I feel the best approach here is to expect some additional downside into the $18 to $22 and play with a willingness to buy under $20 via a ratio put spread.
Buy to open 1 May 17 $22.50 put at $1.50.
Sell to open 2 May 17 $20 puts at $0.60.
Net Cost: $30
Max Reward: $220
Max Risk: $2,030
Days until expiration: 49
Tim Collins is a regular contributor on Real Money Pro specializing on options trading and technology stocks. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen, Nick McCullum, Peter Tchir and others.)
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