The Next Trillion Dollar Company?

The economic ups and downs of 2020 put entire industries underwater, but the technology sector thrived. There was instant demand from consumers, educational institutions and businesses of all sizes for cloud-based services, which drove up revenue—and share prices—for companies like Amazon, Netflix, Zoom and Peloton.

Of course, that growth wasn’t limited to US-based companies. International tech companies saw increased demand as well. Singapore-based Sea Limited, an internet company specializing in digital entertainment, digital financial services and eCommerce, saw record-breaking growth in 2020 and that trend continued into 2021. Unlike most US-based stay-at-home stocks, Sea Limited didn’t lose momentum as people began to venture out—a fact that has many investors intrigued.

Will Sea Limited stock continue its growth trajectory, even as revenues decline for the rest of the tech world?

Sea = Entertainment + Financial + eCommerce

The digital revolution has disrupted most industries and there are a few that experienced a complete transformation. For example, web-based entertainment like online gaming and streaming video made traditional forms of entertainment obsolete and financial services went from an elite group of mature organizations to an assortment of start-ups.

Even basic retail sales are handled in a whole new way. Most consumers research their purchases online and the percentage that makes electronic purchases vs. visiting a brick-and-mortar retailer is increasing at an unprecedented rate.

Sea Limited is right in the center of these three digital trends with a core business focused on digital entertainment, digital financial services and eCommerce. Its first venture, the gaming company Garena, dates back to the company’s 2009 launch.

The Garena platform gives users in 130 unique markets the ability to participate in mobile and PC games that are developed, curated and localized in-house. Garena’s goal is to encourage the social aspect of gaming, so the platform has a strong focus on player interaction and engagement.

On the financial services side, Sea Limited’s SeaMoney offers consumers in Southeast Asia the opportunity to perform basic banking transactions online. This division was established in 2014 and has grown to include payment processing, credit, mobile wallet services and a collection of complementary services.

The final arm of Sea Limited is its eCommerce site, Shopee. Since its 2015 implementation, Shopee has grown into the top eCommerce platform in Taiwan and Southeast Asia. Sea Limited makes the most of its market leadership position by connecting Shopee customers with SeaMoney products to deepen customer relationships.

Sea Limited—Third Quarter Revenue and Earnings Growth

Sea Limited leaders held the company’s third-quarter earnings call on November 16, 2021. Chairman and Group Chief Executive Officer Forrest Li and Chief Financial Officer Tony Tianyu were enthusiastic about the company’s results.

They started the call with the news that total GAAP revenue went up 122 percent year-over-year to a total of $2.7 billion. Better still, in addition to strong revenue growth, Sea Limited increased earnings year-over-year. Gross profit went up by 148 percent for a total of $1 billion.

That isn’t to say Sea Limited is profitable. The company had net losses of $571 million for the third quarter. However, most analysts aren’t especially concerned—at least not yet—because these losses appear to be directly related to the improved revenue.

The increased revenue was due, in part, to Sea’s focus on expansion and growth. The company spent the third quarter enhancing existing products, launching new initiatives and exploring opportunities in neighboring markets.

For example, Sea provided Indonesian merchants and local support services with the tools and resources necessary to build successful online storefronts. Some of these resources include marketing support facilities that house photography studios, inventory management systems, management courses and one-on-one training sessions. These efforts prepare sellers to connect with international customers through Shopee.

Similar efforts went into supporting rural Malaysian merchants. In the case of Malaysia, Sea partnered with government agencies like the Malaysian Communication and Multimedia Commission to provide sellers with web services. From there, Sea focused on training these entrepreneurs to optimize their use of Shopee to reach an international audience.

CEO Li noted that since the initiative’s July 2021 inception, Sea has trained and supported more than 6,000 rural merchants across the country.

Sea Limited—Q3 Revenue and Earnings Growth by Division

When revenues are considered division by division, Sea’s path to success is clear. The digital entertainment business Garena saw a 29 percent increase in bookings year-over-year for a total of $1.2 billion. Garena’s adjusted EBITDA increased 22 percent year-over-year to a total of $715 million.

The eCommerce division grew at a faster rate than the overall market during the third quarter, thanks to a variety of initiatives intended to reach emerging digital economies. Shopee achieved a 134 percent year-over-year increase in GAAP revenue growth for a total of $1.5 billion. Gross orders were up by 123 percent year-over-year for a total of $1.7 billion, marking the ninth consecutive quarter in which Shopee saw triple-digit year-over-year order growth.

Gross Merchandise Value (GMV) went up by an astonishing 81 percent for a total of $16.8 billion. Shopee has continued to improve on its monetization strategy, which drove a rise in GAAP revenue as a percentage of total GMV from 6.7 percent in the prior-year period to 8.6 percent in the third quarter of 2021. Examples of areas in which Shopee has realized increased monetization revenues include transaction-based fees, advertising revenue and value-added services.

On the financial services side, SeaMoney also saw impressive third-quarter results. Mobile wallet services grew total payment volume 111 percent year-over-year for a total of $4.6 billion and total quarterly paying users hit $39 million—a year-over-year increase of 120 percent.

This is critical to Sea Limited’s overall strategy of expanding mobile wallet use cases to add value and increase the number of businesses served. Examples of new online and offline merchant partners include Indonesia’s Blue Bird Taxi, Malaysia’s Google Play, Thailand’s FamilyMart and Vietnam’s Lotte Cinema.

Sea Reports Q3 User Growth

User growth was strong across all business units in the third quarter, but the most interesting figure came out of Garena. Quarterly Active Users (QAU) increased by 27 percent year-over-year for a total of 729 million. More importantly, quarterly paying users went up 43 percent year-over-year to 93 million. To look at these results from another perspective, the paying user ratio went from 11.4 percent in the third quarter of 2020 to 12.8 percent in the third quarter of 2021.

It appears that Garena has captured the attention of some of the world’s largest gaming communities. Players are attracted to the high priority Garena puts on user experience and they are leveraging the platform’s features to spend time with friends and family in addition to forming new connections. The steady growth in Garena’s user base is expected to gain momentum as new Free Fire features roll out.

Sea Limited Market Share

Sea Limited is working on all fronts to enhance market share within its existing footprint, in addition to expanding its reach throughout Southeast Asia and into Latin America. That strategy is delivering results in a big way.

Garena’s Free Fire was ranked second in the world for mobile games on Google Play as measured by average monthly active users. In some markets, it has been the highest-grossing mobile game for multiple consecutive quarters. These include India (four consecutive quarters), Latin America (nine consecutive quarters) and Southeast Asia (nine consecutive quarters).

On top of that, for the third consecutive quarter, Free Fire came in at the top of the list for the highest-grossing battle royale game in the United States and it was the second-largest grossing mobile game across all categories on Google Play.

Because Garena is focused on expanding its global reach with new features, business leaders indicated that they expect market share to continue its growth trend. In the fourth quarter, Garena will host several e-sporting events, such as the Free Fire EMEA Invitational and the Free Fire Asia Championship.

Shopee is also growing its market share at a rapid rate, thanks to the company’s deliberate efforts to increase engagement and add value within the Shopee community. From a global perspective, Shopee was ranked the number one shopping app on Google Play as measured by total time spent in the app. It was second when measured both by downloads and by average monthly active users.

In certain markets, Shopee earned the number one spot among shopping apps when measured by total time spent in the app and monthly active users. Examples of these markets include Taiwan, Southeast Asia and Indonesia.

Better still, Shopee is making progress in Brazil—a relatively new market for the company. For the third quarter, it was ranked number one for total time spent in the app and for the number of downloads. It came in second among shopping apps when measured by average monthly active users.

Sea Has A Wide Moat

Aside from its financial results, Sea Limited’s moat has investors quite interested. One of the most effective is the networking effect in all three businesses. On the gaming side, users spend more time with Garena when their friends and family also use the platform. The more time spent, the greater the likelihood that they will form new friendships, which in turn increases the amount of time spent utilizing the app.

On the eCommerce side, many merchants sell through Shopee exclusively. As they grow their customer base, Shopee gains users. Perhaps more importantly, Shopee’s commitment to providing tools and resources for underserved communities builds loyalty and encourages referrals, which leads to organic growth.

Finally, the relationship between Shopee and SeaMoney deepens the networking factor, as does the ongoing enthusiasm from merchants. As more merchants enroll in digital payment solutions, their peers must add digital payment options to remain competitive. Since SeaMoney dominates certain emerging markets, it achieves growth without significant investment in customer acquisition.

Sea Valuation—December 2021

Sea Limited stock has been on something of a roller coaster ride as 2021 draws to a close, but before its post-earnings downturn, it had not suffered the same fate as most US tech stocks. While many of the stay-at-home stocks struggled to maintain 2020’s growth in 2021—and gave cautious guidance for 2022—Sea stock increased in value. As of early November, it was up roughly 80 percent year-to-date.

In mid-December, the stock price appeared to hit its floor, but even then, it was up more than 30 percent for the year. Now, Sea share prices are beginning to rise again. At the moment, the company’s market cap is $126.42 billion and shares are trading under 14 times the trailing 12-month revenue. That indicates that the stock may be a bargain for investors willing to buy now and hold long-term.

Sea Stock Risks

Sea Limited faces two significant risks—and by extension, so does anyone who buys Sea stock. First, while Garena is profitable, both the eCommerce and the digital financial services businesses are operating at a loss. Sea relies on Garena to subsidize Shopee and SeaMoney and that’s fine—as long as Garena is profitable. However, that’s not a given.

Right now, Garena is raking in profits thanks to Free Fire, but that won’t always be the case. Eventually, Free Fire will no longer be relevant. If Garena hasn’t come up with another hit by then, there could be a problem.

Second, Sea is focused on a dramatic expansion of its eCommerce footprint and that means a lot of expenses. Some analysts suggest Sea is spreading itself too thin by investing heavily in growth rather than securing the business it already has. Right now, cash flow can support this spending, but that may not be the case forever.

Is Sea Stock a Buy?

Sea Limited is growing at a rapid rate in three high-demand digital services. Unlike certain US-based digital entertainment, eCommerce and digital financial services providers, Sea Limited is focused on emerging markets. That means it isn’t competing with industry giants to increase its market share. Instead, it is essentially creating new markets where none existed before. That gives Sea a first-mover advantage, which is likely to inspire considerable loyalty among its previously underserved clients—a formidable obstacle for companies that attempt to pull market share away from Sea.

That isn’t to say Sea Limited is ignoring established markets. The company is exploring opportunities for expanding its footprint in areas of Europe while continuing to increase its presence in Taiwan, Southeast Asia and Brazil. When Sea Limited’s total addressable market is considered, there seems to be no cap on the company’s potential growth. According to some analysts, Sea might hit a $1 trillion valuation by the end of the decade.

Even in the short term, Sea Limited’s third-quarter results offered reason to be optimistic. The company exceeded its own expectations, particularly in the eCommerce space. The success of Shopee prompted business leaders to raise full-year 2021 eCommerce revenue guidance from a range of $4.7 billion—$4.9 billion to a range of $5.0 billion—$5.2 billion. At the midpoint, this figure would represent year-over-year growth of 135 percent.

Meanwhile, Sea stock is trading at a relatively low price when considered against growth potential. In many ways, it is the sort of company that value investors flock to, which makes Sea stock a buy.