AT the height of investor enthusiasm back in October, the market value of South-East Asian Internet company Sea Ltd climbed above US$200bil (RM837bil).

       Today, it’s worth less than half of that. It may still be overpriced.

       Driving this massive ramp-up was the credible belief that its position at the cross section of gaming and e-commerce, and its location servicing a quick-growing market, meant that profits would eventually flow to the company.

       Four years on from its United States listing, that still hasn’t happened.

       In fact, by the end of last year, it had racked up almost US$7bil (RM30bil) in cumulative losses with red ink set to spill for at least another year.

       To justify their valuations, investors and analysts point to Sea’s rapid growth.

       And it is impressive.

       Revenue doubled each of the past four years, driven firstly by a foundation in online games and more recently boosted by a growing presence in e-commerce.

       “Free Fire,” its battle royale game, similar to “PUBG” and “Fortnite,” continues to be a top-grossing title across the region and helps support both revenue and user engagement.

       That strength means Sea’s digital entertainment unit, Garena, delivers the lion’s share of gross profit.

       Yet, it’s the commerce business, Shopee, that elicits the most excitement from shareholders.

       In November, management raised its 2021 growth forecast for the unit to 135%, from a prior figure of approximately 127%, with revenue to come in at around US$5.1bil (RM21.34bil).

       The impact of Covid-19 only partially explains the stronger outlook.

       On one hand, consumers forced to socially distance have turned to e-commerce. Yet, incomes have also been hit, hurting spending power.

       So, the narrative that management is keen to talk up, with recent quarters of data as evidence, is that the pandemic is helping shape consumer behaviour.

       They will then continue to play games and shop online even after the pandemic subsides, goes the argument.

       Today’s market valuation, even after a 55% drop from its peak, indicates that investors are willing to believe in the notion that Sea has established such patterns and is in a dominant position to profit from them.

       But at more than US$90bil (RM376bil), it’s still expensive.

       With no net income, it’s impossible to look at the company’s price-to-earnings ratio.

       But price-to-sales is the next best thing. Sea is currently trading at 9.5-times expected 2021 sales and 6.5-times analyst estimates for revenue this year.

       By comparison, Tencent Holdings Ltd, Asia’s largest mobile games company, sits at 6.5-times and 5.6-times respectively.

       Alibaba Group Holding Ltd, the biggest e-commerce provider in the region, comes in at around 2.5-times and 2.2-times.

       There’s logic to the argument that Sea deserves a premium over peers because it is growing faster.

       But that only holds weight when management can prove that such expansion is profitable, or may soon become so.

       Sea’s founder and chief executive officer, Forrest Li, has yet to show evidence he can deliver.

       In fact, net loss is rising even amid break-neck growth because the company continues to spend ever larger sums of money on marketing – more than doubling in the first nine months of last year.

       This shows that Sea is buying traffic and revenue, rather than enjoying the significant economies of scale it might expect from having more than 700 million quarterly active users of its entertainment services.

       It’s quite possible that Sea will truly reap the reward from years of burning cash to build its place in South-East Asia’s Internet market.

       But to make that case, management will need to someday stop spending buckets of money to drive the top line, and instead accept slower rates of growth.

       After all, it’s no longer a young startup pitching to hungry venture capitalists.

       Equity-market investors eventually want to see sustained profits. Until that happens, valuations will be at the mercy of sentiment more than logic.

       That’s not a place to be when inflation starts to rise and economies begin to slow. — Bloomberg

       Tim Culpan is a Bloomberg Opinion columnist. The views expressed here are the writer’s own.