Sea Limited (NYSE: SE) has faced challenges that its global counterparts managed to sidestep. Despite being hailed as the Amazon of Southeast Asia, the Singapore-based conglomerate has not enjoyed the same recovery as Amazon or its Latin American counterpart, MercadoLibre.
Diverging from its competitors, Sea Limited initially started as a gaming-focused company before expanding into e-commerce. The key concern for its long-term investors is whether the current challenges will have a lasting impact on the company’s performance five years down the line.
Two of Sea Limited’s segments continue to prosper
Irrespective of Sea Limited’s position in the next five years, the company currently boasts a robust foundation. As the predominant e-commerce entity in Southeast Asia, Sea Limited is fortifying its competitive advantage in the region through the expansion of its logistics network. Notably, the company has inaugurated five new sorting centers and 385 additional first and last-mile sorting centers.
A positive development is the substantial reduction in contribution-margin loss in Brazil, Shopee’s largest non-Asian market, announced during the fourth-quarter 2023 earnings call. This indicates Shopee’s ability to compete successfully in non-core markets, presenting an optimistic outlook for its potential status five years hence.
In 2023, Shopee exhibited impressive growth, with a 29% year-over-year increase in gross merchandise volume and a notable 46% surge in orders. The company’s strategic positioning in developing nations further suggests the potential for continued revenue improvement as Southeast Asia experiences ongoing economic growth.
Within its digital financial services segment, SeaMoney, the SME credit business took the lead by providing escalating loan volumes to small and medium enterprises. The segment’s banking and insurance operations also reported growth, making SeaMoney the company’s fastest-growing segment. Given the evolving nature of SeaMoney’s markets in Southeast Asia, the trajectory of growth is likely to persist for years to come.
Garena’s performance points to significant uncertainty
The challenges persist for Garena, Sea Limited’s gaming division, despite the ongoing success of Free Fire, which remains the world’s most-downloaded mobile game.
While Free Fire continues to thrive, Garena’s other gaming offerings have not managed to capture similar attention. Notably, the anticipated relaunch of Free Fire in India, a country with a population of 1.4 billion, has yet to materialize. The game was banned in India in 2022, prompting Sea Limited to collaborate with regulators in an effort to reintroduce it to this significant market. The potential restoration of access to India holds promise for bolstering Free Fire and, consequently, Garena. However, the uncertainty surrounding the success of Garena’s other games makes it challenging to predict the division’s position in the years to come.
Sea’s financials
Garena poses significant challenges for Sea’s future, as evidenced by its 2023 revenue decline of 44%, while Shopee and SeaMoney experienced robust growth, increasing revenue by 24% and 44%, respectively. The overall revenue for Sea Limited grew modestly by 5% to reach $13.1 billion during the same period.
Fortunately, a positive aspect was the reduction in operating expenses, leading to Sea achieving its first yearly profit of $163 million. This newfound financial independence enhances Sea’s flexibility as it navigates its future path.
Furthermore, amidst both bullish and bearish market conditions, Sea Limited’s stock exhibited remarkable resilience, surging over 130% in the last five years. Notably, this impressive growth occurred even without achieving a yearly profit until recently. With gains reaching as high as 2,100% during the bullish market, current investors have reason to be optimistic about the company’s potential performance in the next five years.
Investors also stand to benefit from favorable valuation metrics, with the price-to-sales (P/S) ratio standing at just over two times earnings. Despite recently turning profitable, Sea Limited’s forward price-to-earnings (P/E) ratio remains modest at 47. This valuation could prove advantageous if Garena improves its performance, and the other segments continue on their growth trajectories.
Sea Limited in five years
While the future is inherently uncertain, current trends paint a positive picture for Sea Limited’s stock. The company dominates e-commerce in Southeast Asia, solidifying its competitive position in the region, and there are encouraging signs in the improving outlook for Brazil. Additionally, SeaMoney, being the fastest-growing segment, is poised to continue contributing significantly to the company’s strength in the future.
Although Garena faces challenges with a substantial revenue decline and reliance on Free Fire, if existing trends persist, the impact of Garena’s performance may diminish in significance for Sea Limited. This shift would allow the company’s other two segments, Shopee and SeaMoney, to take the reins in driving overall growth. If these trends continue, the stock price has the potential to ascend over time.
