E-commerce giant Sea Limited (SE 0.38%) has shown incredible business growth since its IPO. From its debut around $4.5 billion in 2017, its current market capitalization has reached $190 billion, yet Sea Limited is still growing its revenue at or near triple-digit rates each quarter. Sea Limited's growth strategy -- built on hit games and a brilliant e-commerce platform -- remains intact, potentially allowing the business to continue expanding internationally toward a $1 trillion market cap.
Its growth strategy
Sea Limited expands by bringing its popular video games into a market, then promoting its other services through them. Its hit title Free Fire -- which has over 1 billion downloads on Alphabet's (GOOGL -0.55%) (GOOG -0.44%) Google Play -- was the highest-grossing mobile game in Southeast Asia, Latin America, and India in the second quarter of 2021. Sea has remained atop those charts for the past eight consecutive quarters in Latin America and Southeast Asia, and three consecutive quarters in India.
After Free Fire gains popularity in a country, Sea Limited uses it to promote the company's e-commerce arm, Shopee. Revenue from these two divisions of Sea Limited is then used to fund its fast-growing financial services arm, Sea Money. By offering players discounts on Shopee through the game, consumers become integrated into Sea's ecosystem. This strategy has worked well: Shopee grew its quarterly revenue to $1.2 billion in the second quarter of 2021, which was higher than Sea Limited's total adjusted 2018 revenue of $1 billion.
Sea is not profitable by any means, however. The only segment that generated positive operating income in the second quarter was its video game segment, whose $600 million in operating income got offset by more than $900 million in operating losses from the rest of the business.
On the other hand, the company has generated nearly $600 million in free cash flow over the past four quarters, which it's used to support two growth opportunities. The first is Sea Money, Sea Limited's digital payments arm. Sea's free cash flow potentially helped offset Sea Money's $100 million second-quarter operating losses. It also contributed to its accelerated adoption: In the latest quarter, Sea expanded its partnership with Mastercard (MA -0.20%) in Thailand to enable contactless payments, as well as striking a deal with Philippine grocer Puregold, which will now accept Sea Money payments in 400 of its grocery stores. Sea Money now has $4.1 billion in total payment volume, with almost 33 million quarterly paying users -- representing over 100% growth for both metrics for the second quarter compared to the same time last year.
Sea's second focus for its cash is its expansion efforts outside of Southeast Asia. This includes Brazil -- where Shopee has recently become the most downloaded shopping app in Brazil. The company is also prepared to launch into European countries, including Poland, after its expansion into India earlier this year.
With operations around the world, Sea Limited may be trying to juggle too many balls at one time. The company faces stiff competition in many of its markets: MercadoLibre (MELI 0.43%) in Brazil and Latin America, Amazon (AMZN -1.44%) in Poland, and plenty of companies in Southeast Asia like GoTo -- a new merger from two e-commerce behemoths that are trying to make a super-app. There are other powerful e-commerce players in Southeast Asia, including Coupang (CPNG -1.31%), which recently entered the market. With all of this competition on all fronts of its e-commerce business, it could be hard for Sea to continue expanding while maintaining its dominance. To fend off these rivals, Sea Limited offers shoppers frequent flash sales and discounts that bring massive traffic to the platform and help keep consumers in its ecosystem.
Will this ever end?
The key to Sea Limited's growth internationally has been Free Fire's popularity, and investors have questioned how long Free Fire could reign. It's been around since 2017 --old for a video game. Fortnite, a multiplayer video game similar to Free Fire, was launched around the same time as Free Fire, but it has already seen its popularity decline. Sea's quarterly paying and active users have been increasing -- up 85% and 45% year over year, respectively, in the most recent quarter, amid a trend of steady quarter-to-quarter growth. Sea also hosted the Free Fire 2021 Esports World Series, which attracted over 5 million online viewers, demonstrating that Free Fire is still very popular.
Nonetheless, Sea Limited has begun creating new games to lessen its reliance on Free Fire. In the latest quarter, Sea announced that it is redistributing Tencent's (TCEHY 3.69%) Moonlight Blade Mobile, an online roleplaying game that saw strong popularity in China after making $50 million there in its first week.
Sea Limited's future growth relies on its international expansion, which rests its gaming success. In the future, investors should keep an eye on digital entertainment revenue growth, along with the active user and paying user count for its games -- making sure that this growth in video games also translates into other parts of the business. If Sea Limited continues bringing hot new games to the market as it expands geographically, and promoting Shopee and Sea Money through those outlets, its future could be extremely bright.