The Singapore-based e-commerce and gaming giant Sea Limited (SE 1.51%) has been on a roll this year, with its stock rising 51% year to date. However, this is a rather poor performance for Sea historically: Its annualized return since its IPO in 2017 is over 105%.
This massive return is because of the company's impeccable business performance. The company has become one of the most popular companies in Southeast Asia, growing revenue by over 2,800% since late 2016. Amazingly, this stellar performance has continued: It's still putting up triple-digit year-over-year growth as a $167 billion company. This three-headed dragon is still growing immensely, and its growth opportunities keep expanding, which is why I think Sea Limited has plenty of success ahead.
Image source: Getty Images.
A gaming giant
Sea Limited has three business segments, the first being its gaming segment: Garena. Garena is a global mobile game developer, primarily known for the game FreeFire. This game has rapidly grown in popularity in Asia and Latin America, and it is even starting to gain traction in the U.S. It is the second-largest game on Alphabet's Google Play Store by monthly active users and the highest-grossing mobile battle royal game in Southeast Asia, India, Latin America, and the U.S.
This dominance has led to Q3 revenue from its digital entertainment segment -- which primarily consists of FreeFire -- to grow 93% year over year to $1.1 billion. This comes from a massive base of free and paying users -- totaling 729 million quarterly active users globally, which has increased 27% on the year.
This segment of the company does not come without its risks, however. The majority of growth from this segment is from the success and monetization of FreeFire's users. This means that if the mobile game's popularity withers, this segment could get hurt. Sea has already seen growth decline in this segment, decelerating year-over-year revenue growth from 167% in Q2 2021 to just 93% this quarter.
While growth might be decreasing, 93% growth is still impressive. Sea has also been making improvements to increase engagement and monetization, like Free Fire MAX, a new immersive standalone version of Free Fire with enhanced specifications. If the company continues to create new engagement tools while it develops more popular games, the company could continue growing at impressive growth rates, although the days of Garena's triple-digit growth might be behind it. The real growth driver for Sea is Shopee, its e-commerce arm.
E-commerce dominance
With over 1.7 billion Q3 orders on Shopee, the e-commerce platform has shown massive dominance. The platform brought in $1.5 billion in revenue in Q3, which represented 134% year-over-year growth. Like FreeFire, Shopee is seeing broad success, holding the top spot globally in the Shopping category on the Google Play Store by total time spent on the app. Even in Brazil, where Shopee launched just two years ago, Shopee was the most-downloaded app in the Shopping category on the Google Play Store.
Shopee isn't satisfied with this -- it wants to grow its role as a global e-commerce company. In Q3, Sea announced the expansion of Shopee into Poland, France, and Spain. This is especially important because it's the first expansion outside of Asia and Latin America.
With this broad expansion, the company faces risks. The primary risk is increased competition as it expands into new markets. Investors should monitor how Sea continues to deal with competition from Coupang (CPNG 1.87%) in Southeast Asia, MercadoLibre (MELI 0.60%) in Latin America, and Amazon (AMZN 1.11%) in India and Europe.
A promising business segment
SeaMoney is Sea's youngest business segment. In a highly underbanked part of the world, SeaMoney is trying to bring financial services to citizens through technology. Despite being just seven years old, SeaMoney already has 39 million quarterly paying users, with over $4.6 billion in payment volume flowing through SeaMoney. Those figures grew 120% and 111% year over year in the recent quarter, respectively.
The company has plenty of growth opportunities for this segment of its business, ranging from buy now pay later offerings to insurtech solutions. While Sea's other business segments have immense promise, SeaMoney is likely the part of the business that has the most room for growth.
For three astounding business segments, investors in Sea understandably have to pay up. The company trades at 18 times sales, which is higher than a competitor -- Coupang -- which trades at just two times sales. However, Sea's ability to grow revenue in nearly all three business segments at triple-digit rates or higher after 12 years is tough to beat. The company's visionary leadership has created a behemoth across the world, yet its growth makes the company look like it's still in the early stages.
If Sea can see Shopee succeed in new geographies and continue expansion while growing SeaMoney and its offering, the company could see astonishing growth. Despite this company nearing a $200 billion market capitalization, I see tremendous growth opportunities left for this business, which is why Sea already makes up a high percentage of my portfolio.
