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Breaking Down Sea Limited's Business Model

By Brian Withers - Mar 24, 2021 at 7:42AM

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One part profits, three parts awesome.

Sea Limited (SE 3.60%) has a highly profitable segment that's allowing it to fund its other two growing businesses. The digital entertainment division for this South East Asia e-commerce player is throwing off profits, enabling massive investments into building out a far-reaching e-commerce and payments infrastructure. On a Fool Live episode recorded on March 12, Fool contributor Brian Withers discusses the different parts of this growing regional operator's business and how they add up to an incredible growth engine.

Brian Withers: I'm going to share, Sea Limited's business model. It's important to go back a little bit in history and tell their story here too. Am going to click it over to Sea Limited. You see that? Sea Limited actually started, they were actually named Garena when they started back in 2009. Garena is their digital entertainment or gaming division. Their e-commerce business actually didn't start until 2015. You can see in the middle of this digital financial services started in 2014. Part of the reason it started is because they wanted to capture in-game payments digitally. Which makes a lot of sense that there are some synergies there, as well as if you have a digital payment service that makes it easy for people to buy goods online. Interestingly enough, they have these three businesses. As you'll see, their digital entertainment with the growth of these other two, is becoming a smaller portion of their overall.

Digital entertainment, they focus on growth of their user base. You can see that they have 610 million quarterly active users, that's growing at a very nice clip here. Then quarterly paying users is growing. It's important to see this is growing at 120 percent versus 72 percent. That says that they're monetizing, a bigger percentage of their users over time. To me, that means this is a really sticky platform and their Free Fire game is often voted the number one downloaded game all around the world.

E-commerce, similar deal, you're measured on orders and you're measured on gross merchandise value [GMV]. This is in billions, this is 12 billion last quarter. This is not a fly by-night, teeny little company. They've come along way in the five or six years since when they started their business and they had a billion orders last quarter. That's just incredible. A thousand million is a billion. Yeah, that's right. That's just amazing.

Then financial services is actually their smallest piece. They had 2.9 billion in mobile wallet transactions in Q4, and for the year they had eight billion. This is really just getting started as I'll show you. The digital financial services or the digital wallet is only 1.4 percent of their business. This is their revenue by segment for this year; this is 2019 and 2020. You can see digital entertainment, it's becoming a smaller portion of their overall at one point, that was 100 percent of their business.

E-commerce now has grown to 50 percent. They have this small other services piece which is dwindling over time as they focus on these other businesses. But it's really cool to see that the whole business has doubled over the year. This e-commerce and digital financial services are becoming a much bigger portion of their overall.

That's really their business model; they're founded by their gaming business, which is profitable and allows them to invest in their other businesses; the e-commerce, which requires significant amount of investment and their payment services, which requires also investment to build out that infrastructure.

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