August 22, 2022
Sea of Trouble
Sea Limited (SE) is a Singapore-based company that provides digital entertainment and e-commerce services. The company reported earnings on Tuesday before the bell that showed a wider loss than a year earlier, though analysts had expected poorer results. Revenues rose from a year earlier but failed to meet the consensus expectation. Perhaps more importantly, SE did not report revenue guidance due to “increasing macro uncertainties,” whatever that means.
Although there are few analysts covering SE, most consider the stock a buy. In fact, three reiterated their buy or overweight ratings after the dismal report. Moreover, the average price target for SE stands at an absurd $138, more than double the stock’s Friday close. This looks like an opportunity to play contrarian, since analysts are notably bullish on a stock that has cratered 82% in 10 months. Perhaps some analysts will come to their senses and downgrade the stock and lower their price targets, which would pressure the shares.
On the charts, the stock plummeted 25% after earnings through the Friday close. The plunge pulled the shares below both the 20-day and 50-day moving averages. We are thus playing a call credit spread with the short call sitting on the 50-day (blue line).
If you agree that SE will be unable to stage a rally after a dismal earnings report and continued meddling by Chinese authorities, consider the following trade that relies on the stock staying below $76 (red line) through expiration in six weeks:
Buy to Open the SE 30Sep 79 call (SE220930C79)
Sell to Open the SE 30Sep 76 call (SE220930C76) for a credit of $0.75 (selling a vertical)
This credit is $0.03 less than the mid-point price of the spread at Friday’s $67.67 close. Unless SE falls quickly, you should be able to get close to that price. The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $73.70. This trade reduces your buying power by $300, making your net investment $226.30 per spread ($300 – $73.70). If SE closes below $76 on September 30, both options will expire worthless and your return on the spread would be 33% ($73.70/$226.30).