Sea Limited (SE 0.38%) went public nearly four years ago at $15 per share. The Singapore-based gaming and e-commerce didn't initially attract much attention, but it's now worth about $350 per share.
Sea's business seemed wobbly at first, but the robust growth of its gaming unit Garena and its e-commerce marketplace Shopee silenced the bears. Its revenue rose 20% in 2017, then surged 100% in 2018, 163% in 2019, and 101% in 2020. Analysts anticipate another 104% growth this year.
Sea's breakneck sales growth convinced many investors to overlook its widening net losses and high valuations. But can Sea maintain its multibagger momentum over the next five years?
The best-case scenario for Sea
Sea's near-term growth relies on three main things: Shopee's continued growth as Southeast Asia's top e-commerce marketplace, Shopee's ability to keep reducing its adjusted EBITDA losses per order, and the longevity of Garena's hit self-developed battle royale game Free Fire.
Sea's longer-term growth will rely on Shopee's overseas expansion into new markets like Latin America, the expansion of its nascent SeaMoney fintech ecosystem with new digital payment services, and the diversification of Garena's first-party gaming business with new hit games.
Growing faster than its top markets
Southeast Asia's e-commerce market grew from $5 billion in 2015 (the year Shopee was launched) to $62 billion in 2020, according to Statista Research, and could be worth $172 billion by 2025.
If Shopee matches that CAGR of 22.6%, Sea's e-commerce revenue would rise from $2.2 billion in 2020 to $6.1 billion in 2025. However, Shopee could easily outpace the broader market, especially if it pulls more shoppers away from Alibaba's (BABA 4.79%) Lazada and gains more shoppers in Latin America.
Morgan Stanley expects the Latin American e-commerce market to grow at a CAGR of 21% between 2019 and 2025, so there could still be plenty of room for Shopee to expand in the shadow of MercadoLibre (MELI 0.43%), Latin America's leading e-commerce company.
As for Garena, Free Fire's popularity in Southeast Asia and Latin America made it the most downloaded mobile game in the world last year, according to App Annie.
Between 2020 and 2025, Research and Markets estimates the Southeast Asian gaming market will grow at a CAGR of 8.5%, while Mordor Intelligence expects the Latin American mobile gaming market to expand at a CAGR of 10.5%. If Garena grows at a comparable CAGR of 10%, Sea's annual gaming revenue could rise from $2.0 billion in 2020 to $3.2 billion in 2025.
Therefore, Sea merely needs to match the average industry growth rates to more than double its revenue from $4.4 billion in 2020 to nearly $10 billion in 2025. However, analysts already expect Sea's revenue to hit $8.9 billion this year and increase 49% to $13.3 billion next year -- so Shopee and Garena will likely grow faster than their respective markets.
What could go wrong?
Sea's top-line growth is impressive, but it won't turn profitable anytime soon. Its adjusted EBITDA turned positive last year, but only because Free Fire generated higher-margin revenue than Shopee -- which continues to book losses on each order. Its SeaMoney fintech segment is also deeply unprofitable.
Free Fire is already four years old, so Garena desperately needs to launch a sequel to Free Fire or another hit mobile game to offset Shopee and SeaMoney's losses. Shopee booked an adjusted EBITDA loss of $0.41 per order in the second quarter of 2021, compared to $0.50 per order in the prior-year quarter, but it could still take years for the online marketplace to break even.
Meanwhile, Lazada -- which lost its crown to Shopee as Southeast Asia's top e-commerce platform in 2019 -- could strike back with aggressive discounts and marketing campaigns. If Shopee gets distracted with its expansion into Latin America, it could lose shoppers to Lazada in its core market.
Simply put, Sea is spinning a lot of plates. Sea's stock is already priced for perfection at over 20 times this year's sales, so dropping any of those plates could cause its stock to crash.
Why Sea's stock could still head higher
I doubt Sea will replicate its post-IPO gains over the next five years, since its valuations are already high and its growth should gradually decelerate. However, I believe its price could still triple if Shopee holds Lazada at bay in Southeast Asia and expands across Latin America and Garena launches more hit games.