As you read these words, digitization is reshaping the world. This year, consumers will spend a record $4.9 trillion shopping online, according to eMarketer. And that figure will keep growing at 11% annually through 2025, reaching $7.4 trillion. Over the same period, digital wallet usage is expected to double, and the mobile gaming industry will grow at an annualized pace of 14%.
As those trends play out, few companies are better positioned to benefit than Sea Limited (SE -0.69%). The stock has already generated monster returns for shareholders, skyrocketing 2,410% over the past three years. But Sea's growth story is far from over. In fact, I think this stock will break out over the coming decade, achieving a $1 trillion valuation.
Here's what you should know.
Image source: Getty Images.
Three growth stories
Sea Limited is a holding company that owns three different businesses, each of which fits into a high-growth industry: Shopee (e-commerce), SeaMoney (digital finance), and Garena (video games). Collectively, Sea primarily operates in Southeast Asia and Taiwan, though it has more recently expanded into Latin America and Europe, too.
Video game developer Garena was the first of Sea's three businesses, and it remains critical to its competitive edge. The company is best known for Free Fire, the highest-grossing mobile game in Southeast Asia and Latin America for the past nine quarters, and the highest-grossing mobile game in India for the past four quarters. More importantly, Garena is profitable on a GAAP basis, and it has been for years . In fact, the business generated $611 million in operating profit in the most recent quarter, which translates into a 55% operating margin.
That substantial cash flow has allowed Sea to invest aggressively in e-commerce. As a result, Shopee is the most popular online marketplace in Southeast Asia by a wide margin, receiving an average of 342 million visits per month, while the next closest competitor sees just 137 million. That gives Sea a significant edge, powering the flywheel that drives its business. Specifically, sellers tend to follow buyers, and as more merchants list items on Shopee, consumers benefit from a greater selection of products. In turn, that should bring more buyers to the marketplace, further enticing sellers to join Shopee.
To further reinforce that advantage, Sea has invested in last-mile logistics (Shopee Xpress) and payment processing (SeaMoney), both of which create additional value for Shopee merchants. But SeaMoney has also expanded beyond the Shopee marketplace. Consumers can spend money through the mobile wallet at a growing number of third-party locations, both online and offline. That's particularly important, because 73% of the Southeast Asian population is unbanked, meaning they don't have access to savings accounts or debit cards.
Breakout financial performance
Not surprisingly, Sea's strong competitive position across three different industries has powered an impressive financial performance. In the third quarter, Garena's quarterly paying user base jumped 43% to 93.2 million, Shopee's gross merchandise value rose 81% to $16.8 billion, and SeaMoney's payment volume surged 111% to $4.6 billion.
Collectively, that translated into revenue of $2.7 billion, up 122%. And while Sea is still losing money on a GAAP basis, cash from operations reached $513 million through the first nine months of 2021, up 39% over the prior year. That means Sea's businesses generate sufficient cash flow to pay the bills. Many fast-growing companies can't make that claim.
The future is digital
Going forward, the tailwinds of digitization should help Sea maintain that momentum. For instance, only 440 million people (75% of the population) in Southeast Asia are currently connected to the internet, according to a report from Bain & Company. That figure is far lower than the 94% internet penetration in North America, meaning a good number of Southeast Asians can't even access digital services yet.
However, the pandemic supercharged digital transformation initiatives last year, and online spending in the region is expected to reach at least $700 billion by 2030, and that figure could be as high as $1 trillion. That means the market will grow between fourfold and sixfold in the next nine years. And as a leader in gaming, online commerce, and digital finance, Sea Limited is well-positioned to generate market-beating returns for shareholders.
In fact, I believe this company -- which currently has a market cap of $175 billion -- should be worth $1 trillion a decade from now, implying annualized growth of at least 19% through 2031.
