Alphabet (GOOG 0.25%) (GOOGL 0.19%) and Sea Limited (SE 7.41%) operate in quickly growing markets, and both have established themselves as leaders within their geographies.
Those advantages have already led to big rewards for investors -- shares of Alphabet and Sea Limited have surged 115% and 1,480%, respectively, in the past three years. Even so, I think these leaders have room to run. Here's why.
Alphabet
Alphabet breaks its business into Google Services, Google Cloud, and Other Bets. Each segment varies in maturity and profitability, but all three contribute to the long-term investment thesis. So let's look at them individually.
Image source: Getty Images.
Google Services includes Alphabet's core ad business. Platforms like Google Search and YouTube draw consumers in droves, making them valuable to marketers. In fact, Google collected 28% of all digital ad spend in 2020, according to eMarketer.
Despite losing ground to Facebook in recent years, Google is still the market leader. And its continued efforts to improve search through artificial intelligence should keep the company on top.
In 2020, Google Services generated $169 billion in revenue, up just 11% from the prior year. But that pace accelerated dramatically in Q1 2021, as Google Services revenue surged 34%.
Next, Google Cloud is the company's cloud computing business. Despite trailing Microsoft and Amazon, Google Cloud is growing at a good clip and it's slowly gaining market share.
|
Google Cloud |
2017 |
2020 |
CAGR |
|---|---|---|---|
|
Revenue |
$4.1 billion |
$13.1 billion |
47% |
|
Market share |
6.4% |
7% |
N/A |
Data source: Alphabet SEC filings and Canalys. CAGR = compound annual growth rate.
On the Q1 earnings call, CEO Sundar Pichai highlighted the advantages driving Google Cloud's growth: expertise in data analytics and artificial intelligence, robust infrastructure services, and support for hybrid-cloud strategies.
Finally, Other Bets is a collection of unprofitable moonshots. This is Alphabet's way of investing in the future -- one successful endeavor could transform the company. And currently, there are several promising frontrunners.
Last year, DeepMind developed AlphaFold, an AI platform that could revolutionize drug discovery. Specifically, AlphaFold uses DNA sequences to accurately predict protein folding. If you're not a molecular biologist, let me explain why that matters.
Genetic information is stored in DNA; through transcription and translation, those genes are converted into proteins. Once formed, proteins fold into complex 3D shapes that determine their function in the body. For instance, HER2 is a growth-promoting protein found in certain cases of breast cancer.
Image source: Getty Images.
For 50 years, molecular biologists have tried to link DNA sequences to protein shape, and it appears DeepMind has finally cracked the code with AlphaFold. Ultimately, this could help researchers better understand diseases and accelerate the drug discovery process.
Alphabet also owns Waymo, an autonomous driving technology company. In 2018, Waymo One launched in Phoenix, becoming the first and only autonomous ride-hailing service in the world. In 2021, Waymo expanded this service to San Francisco, where its AI platform is currently being tested.
There's still a long way to go, but UBS analyst Eric Sheridan believes Waymo's revenue could hit $114 billion by 2030.
Sea Limited
Sea Limited is a holding company that owns video game publisher Garena, online marketplace Shopee, and fintech platform SeaMoney. The company primarily operates in seven markets in Southeast Asia and Taiwan, though it's branching into Latin America as well.
Image source: Sea Limited.
Last year, Sea's growth accelerated as the coronavirus shuttered local businesses. Consumers turned to Shopee for online purchases, and they used SeaMoney's digital wallet to pay the bill. At the same time, gamers filled the social void by playing Garena's Free Fire, the highest grossing mobile game in Latin America, Southeast Asia, and India.
In total, Sea Limited's revenue surged 101% in 2020, but the company continued to gain momentum in the first quarter of 2021. Shopee's gross merchandise value jumped 103%, SeaMoney's total payment volume surged over 200%, and Garena's paying user base rose 124%. Collectively, that translated into total revenue of $1.8 billion, up 147%.
So, what's driving that success? First, the company's scale is a significant advantage; Shopee and SeaMoney are both market-leading solutions across Southeast Asia and Taiwan. And Garena is the leader in e-sports in Southeast Asia, Taiwan, and Brazil.
Second, internet penetration is still relatively low in this region of the world, but that's changing. Last year, 40 million people in Southeast Asia started using the internet, according to research from Google.
Finally, Sea Limited currently operates at a loss, but its Garena business is profitable. That cash flow allows the company to reinvest aggressively across all three platforms. For instance, Sea spent $1.8 billion on sales and marketing last year.
As a whole, these advantages have kept Sea Limited ahead of rivals like Alibaba's Lazada, and they should continue to power strong growth for many years to come.
A word about risk
Sea Limited currently trades at 23 times sales, while Alphabet is priced more reasonably, at nine times sales. Put another way, Sea's lack of profits and pricey valuation make it the riskier investment. However, I think it also offers more upside than Alphabet.
Regardless, it's important to feel comfortable. If Sea looks too risky, consider buying Alphabet. But if you could handle a 30% drop in Sea's share price -- something that happened earlier this year -- then consider buying both.
