The market fell in love with a few stocks in 2020 and 2021, perhaps none more so than Sea Limited (SE 0.05%). With an ambitious three-headed strategy in video games, e-commerce, and financial services, along with rapidly growing revenue, investors bid up shares over 1,000% in just a few years. A good story plays well in a bull market, and Wall Street ate this one up.
In 2022, the Sea Limited story took a turn for the worse. After reporting slowing growth and increasing operating losses, investors lost their lust for Sea Limited, with shares now down 90% from all-time highs. It didn't help that we were in a bear market with high inflation.
However, if we look at Sea Limited's business, it has started to improve its profit numbers significantly so far in 2023. Does this profit turnaround mean a brighter future for Sea Limited investors? Let's investigate.
First head: video games
Sea Limited began its business in the video game space. It owns and operates a mobile game called Free Fire, which has become one of the largest games in the world over the past 10 years. In the third quarter of 2021, Sea Limited reported 729 million active players in its gaming segment, or 9% of the global population. In 2021, the division generated over $1 billion in high-margin revenue every quarter.
Since then, Free Fire has lost its popularity. Active users are down to 544 million, paying users as a percent of active users is slipping, and quarterly revenue has fallen to below $500 million. The video game market is fickle and unpredictable, with studios in need of constant reinvigoration of their products in order to keep revenue growing, if not just stable.
Free Fire has lost its luster among players around the world, but it is still generating profits for Sea Limited. Last quarter, the gaming division posted over $200 million in adjusted earnings, which is helping Sea Limited fund its newer initiatives in e-commerce and financial services.
SE Net Income (TTM) data by YCharts.
Second head: e-commerce
The second head of Sea Limited's three-headed strategy is e-commerce. It has taken a bunch of the profits earned through video games to invest in an e-commerce marketplace called Shoppee. The marketplace mainly operates in Southeast Asia and Latin America, hoping to ride the secular tailwind of online shopping around the globe.
Growth at Shoppee has been solid that continued last quarter. In Q3 of 2023, Sea Limited generated $2.2 billion in e-commerce revenue, up 16% year-over-year. However, unlike gaming, e-commerce has much slimmer unit economics and is burning a lot of money for Sea Limited right now. Just last quarter, the division had an adjusted earnings loss of $346.5 million. This was an improvement over last year, but shows how long Shoppee has before generating a profit.
Maybe an even bigger concern is why Shoppee is losing so much money: marketing. The division ate up the majority of Sea Limited's marketing budget last quarter, with the company spending $861.5 million trying to acquire and retain customers. Marketing spending at Shoppee grew 49% year-over-year, significantly outpacing its revenue growth. One has to wonder what would happen if it stopped spending boatloads on marketing every quarter, and whether this would be a major roadblock to generating bottom-line earnings.
Third head: financial services
Last on our list, and perhaps the most attractive business unit at Sea Limited, is digital financial services. It operates Sea Money, a mobile wallet for payment transfers, loans, and other banking features. Last quarter, it hit $446.2 million in revenue and was growing 37% year-over-year. Profits look solid, with an adjusted earnings of $165.7 million last quarter. Marketing spending is also quite efficient.
There is a tremendous market opportunity to digitize payments and banking in Southeast Asia, with hundreds of millions of customers who have just adopted or are about to adopt smartphones in the next few years. Sea Money looks like one of the leaders in this space, and has been able to put up impressive growth with minimal marketing spend. That sounds like a good business to me.
Adding up these three divisions, Sea Limited generated a net profit of $692 million over the past twelve months, a major improvement compared to 2022 and 2021. All the while, e-commerce continues to hemorrhage money. The stock was clearly overvalued at a market cap of $200 billion, its peak. But at a market cap of $21 billion today, shares trade at a price-to-earnings ratio (P/E) of 30. This isn't dirt cheap, but if you believe Sea Limited can keep growing revenue and eventually get its e-commerce division to profitability, the stock may be a buy at these prices.
