MercadoLibre (NASDAQ:MELI) has been one of the great stocks to own over the past decade. The company had a head-start in Latin America's e-commerce scene, and then used its excess funds to develop a payment option (Mercado Pago) that has exploded over the past three years. The result: a stock that's up over 4,000% since going public in 2007.
But just imagine: What if -- instead of eking by with slim e-commerce margins to build up its bank account -- MercadoLibre had an enormous source of revenue already in place when it started 20 years ago. Where would it be now?
That, essentially, is where Sea Limited (NYSE:SE) finds itself today. The company has a growing e-commerce site (Shopee) and payments system (Sea Money) in its corner of the world. Instead of Latin America, the company is focused on Southeast Asia -- thus the "Sea" in its name. And crucially, it has a hit video segment (Garena) that is helping to fund all of its other ambitions.
Based on the company's second-quarter earnings report, I'll be adding more shares to my portfolio. If you're looking for a great international growth stock, you should consider buying some, too. Here's why:
The view from 30,000 feet
First, let's tackle that earnings report I spoke of. Here's how the company's three different divisions fared in terms of revenue.
|Division||Q2 2019 Revenue||Q2 2020 Revenue||Growth|
|Garena (gaming)||$443 million||$716 million||62%|
|Shopee (e-commerce)||$177 million||$511 million||188%|
|Sea Money (payments)||$2.8 million||$11.9 million||325%|
Investors need to understand the dynamics at play here. Yes, it's very exciting to see the company's payments solution growing so fast. At the same time, its vital that we not get our hopes too high: Even after quadrupling in the second quarter, $11.9 million is a tiny sum, and accounts for less than 1% of all company sales.
At the same time, the growth of the larger businesses is truly impressive. For Garena, the popularity of its hit game Free Fire was on full display: Quarterly active users grew 61% to roughly 500 million. Because the game uses the freemium model (you start for free, but have to pay for the really fun stuff), quarterly paying users were much lower, at 50 million. That said, paying users jumped 91%, and there are now 450 million users who could quickly switch over in the near future.
The story was just as positive with e-commerce. The gross merchandise volume (the value of all the "stuff" sold on Shopee's platform) grew 110% to $8 billion. And the platform still has the most monthly active users in its corner of the world. Combined, they paid for 616 million orders in just three months, two and a half times more than the same time last year!
The story in my head
But it's not actually the company's gaming prowess that has me all that excited. Don't get me wrong: If Garena continues producing hits, I won't be complaining. But the dynamics of gaming are more difficult. A company needs to continue producing enough big hits to keep enthusiasts coming back, or figure out a way to lock them in for the long haul.
That's certainly possible, but it's a higher hurdle than e-commerce and payment solutions. For both of those, there are winner-take-most dynamics. If Shopee's platform becomes the de facto site in Southeast Asia, and if its maritime-based fulfillment network is built out to scale, the network effects involved could make it an enormous force to be reckoned with.
The same holds true for Sea Money: While still very small, it is clearly growing quickly. Once consumers start trusting their mobile wallets to one company, changing to another can be a true hassle. Therefore, the company that gets them first, and provides a level of service to at least keep them happy, will benefit over the long run.
So when I look at the company's profitability as measured by earnings before interest, taxes, depreciation, and amortization (EBITDA), I'm happy to see these dynamics at play.
|Division||Q2 2019 EBITDA||Q2 2020 EBITDA||Growth|
|Garena||$264 million||$436 million||65%|
|Shopee||($248 million)||($306 million)||Loss widened 23%|
|Sea Money||($18 million)||($110 million)||Loss widened 511%|
At first blush, this might seem terrible: The losses in the two smaller divisions are growing. But we need to remember the moats (network effects for Shopee and high switching costs for Sea Money) are wider around these businesses than around gaming. That means that once in the ecosystem, customers are likely in there for the long haul. The same is not necessarily true for gaming.
So it makes all the sense in the world to use the profits from (low moat) gaming to capture long-term market share in e-commerce and payment solutions.
All the pieces are in place
I titled the previous section "The story in my head" because that's all this is: a story about how I think the future will unfold. In reality, that's not a great way to invest. There are thousands of unforeseen things that could happen, rendering this outlook useless.
That's why I developed my own Antifragile Framework for investing in companies regardless of the story in my head. On this, Sea Limited scores very well. That's because:
- Mission: The company has a simple, inspirational, optional mission statement: "To better the lives of consumers and small businesses with technology."
- Moat: All three businesses have clear moats: brand value (Garena), network effects (Shopee), and high switching costs (Sea Money).
- Optionality: There's clear optionality: The company has gone from a simple game-maker to an e-commerce juggernaut in an effort to fulfill its mission.
In addition, the company has a solid balance sheet of $2.2 billion in net cash to continue investing in these opportunities. And as a cherry on top, Sea Limited is led by founder Forrest Li, who owns over 25% of shares.
Add those together and you have a solid investment. That's why I'll be doubling my total position when Motley Fool trading rules allow, bringing it to between 3% and 4% of my real-life holdings.