Most investors likely know three things about Sea Limited (SE 1.20%): that it owns Shopee, the top e-commerce player in Southeast Asia and Taiwan; that it owns the mobile game publisher Garena; and that it is deeply unprofitable.
But this tech company is actually fairly complex, and to better understand its sprawling business, it's worth examining three finer points about it that garner a lot less attention: its dependence on Free Fire; its expansion plans in Latin America; and the growth of its fintech ecosystem.
Image source: Getty Images.
1. Free Fire is the wind in Sea's sails
Four years ago, Garena launched Free Fire, its first self-developed mobile game. The battle royale title, which was optimized for lower-end devices, quickly became one of the most popular mobile games in Southeast Asia and Latin America, and was the most-downloaded mobile game in the world in both 2019 and 2020, according to App Annie.
Free Fire's success significantly boosted Garena's margins, since it wasn't a licensed game like the publisher's earlier titles. As a result, Sea's digital entertainment segment (which houses Garena) started to generate even stronger adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growth -- a sharp contrast to the company's e-commerce segment, which has been growing more unprofitable.
|
Adjusted EBITDA |
2019 |
2020 |
2021 (First 9 Months) |
|---|---|---|---|
|
Digital entertainment |
$1.0 billion |
$2.0 billion |
$2.2 billion |
|
E-commerce |
($1.0 billion) |
($1.3 billion) |
($1.7 billion) |
Source: Sea Limited.
Therefore, Sea clearly needs Free Fire to keep generating that higher-margin revenue to subsidize the expansion of the Shopee e-commerce platform. That's a hefty burden to place on a 4-year-old mobile game.
Looking ahead, Garena's top priorities will be to maintain Free Fire's momentum, expand the franchise with new versions (like Free Fire MAX for higher-end devices), and launch more self-developed titles. Failing to achieve any of those goals could cause Sea's adjusted EBITDA to plummet.
2. Shopee is gaining ground fast in Latin America
When Shopee expanded into Brazil two years ago, skeptics predicted that it would be crushed by MercadoLibre (MELI -1.98%), the 800-pound gorilla of Latin American e-commerce. However, Shopee launched aggressive marketing campaigns, offered steep discounts, and expanded into other Latin American markets.
As a result, Shopee actually overtook MercadoLibre as the most-downloaded shopping app in Latin America earlier this year. By the end of August, Shopee's monthly active users (MAUs) in Latin America had risen 136% year over year to more than 30 million, according to Apptopia. MercadoLibre ended last quarter with 78.7 million unique active users.
Sea doesn't break out its Latin American results yet, but it's likely still racking up big losses as it expands through MercadoLibre's backyard. Last quarter, Sea said Shopee's adjusted EBITDA loss of $0.41 per order remained unchanged sequentially and year over year across all of its markets -- but narrowed by both metrics in its core Southeast Asia and Taiwan market.
In other words, Sea needs to continue narrowing Shopee's losses in Southeast Asia and Taiwan -- all while maintaining Free Fire's growth -- to stabilize its adjusted EBITDA as it expands its massive ecosystem.
3. Sea Limited is evolving into a digital bank
Shopee isn't Sea's only unprofitable business. Its digital financial services segment, which houses the SeaMoney payments platform and other fintech units, is losing money too. This business was also granted a full digital banking license in Singapore last December.
Sea launched the digital financial services segment in the fourth quarter of 2019, and both the total payment volume and the number of quarterly paying users on its mobile wallet app have skyrocketed in the two years since. Unfortunately, its losses are also widening:
|
Digital Financial Services Metric |
2020 |
2021 (First 9 Months) |
|---|---|---|
|
Total payment volume |
$7.8 billion |
$12.1 billion |
|
Quarterly paying users |
23.2 million |
39.3 million |
|
Adjusted EBITDA |
($511 million) |
($467 million) |
Source: Sea Limited.
Once again, this highlights Sea's overwhelming dependence on Free Fire to do the heavy lifting and support its other, unprofitable businesses.
A wobbly (but promising) business model
These three points show us just how unusual Sea's business model is: It's an e-commerce and fintech giant that (for now) relies on the profits from a single mobile game to offset the staggering losses of its other high-growth businesses.
On the bright side, Sea also raised about $6 billion in fresh capital earlier this year with a big secondary stock and convertible debt offering -- and it ended the third quarter with $11.1 billion in cash and equivalents on the books. Therefore, Sea can afford to keep bleeding red ink for the foreseeable future.
I believe Sea still has plenty of growth potential, but it will remain a very volatile stock. Potential investors should be well aware of these risks before betting that the stock will generate multibagger gains.
