Once a gem within Singapore tech conglomerate Sea Limited (SE 0.05%), Garena has fallen from grace as revenue and profitability declined massively over the last few quarters. It didn't help that this game development business had to temporarily halt its operations of Freefire apps in India due to a regulatory ban.
However, the tide could now be turning. For starters, the Indian regulator recently lifted that ban. And after a few quarters of highly challenging times, there are early signs that Garena might have reached a bottom.
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Garena's key performance metrics have stabilized
Garena was already doing well, but when the COVID-19 pandemic hit, demand went through the roof amid global lockdowns. For perspective, quarterly active users (QAU) totaled 355 million in the fourth quarter of 2019, but more than doubled to a peak of 729 million in the third quarter of 2021. Similarly, bookings more than doubled from $512 million to $1.2 billion during that period.
But good times did not last long for Garena as demand for its games could not sustain momentum in the post-pandemic period. Bookings peaked at $1.2 billion per quarter in the third quarter of 2021 and have declined to a low of $443 million in the second quarter of 2023. Similarly, QAU fell precipitously to a low of 486 million in the fourth quarter of 2022.
Investors were disappointed by the horrendous fall in Garena's performance over the last few quarters. Fortunately, things seem to have turned for the better lately. As a start, QAU has stabilized after hitting a low in the fourth quarter of 2022. It further increased to 544 million in the third quarter of 2023. More importantly, Garena had its first quarter-over-quarter booking increase in the last two years in the third quarter of 2023.
Another note is that Garena remained profitable even as revenue and bookings fell in the last two years. For instance, adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) came to $234 million in the third quarter of 2023 on revenue of $446 million .
While it's probably too early to declare victory, I'm hopeful for Garena to sustain, if not improve, its performance from here, especially as it is due to relaunch its flagship Freefire game in India.
The upcoming Freefire relaunch in India
India was one of the most promising markets for Garena thanks to its massive population of more than 1.4 billion. Yet, the Indian government banned the Freefire apps in early 2022 as part of a broader ban on Chinese apps, including TikTok -- leaving the company confused and disappointed.
While the regulators cited privacy concerns, most investors believed that the ban was due to Sea's association with Tencent -- the latter a significant shareholder in Sea -- even though Sea is a Singaporean company. The Singapore government had to intervene in the ban, asserting that Sea Limited is a Singaporean company.
Fortunately, more than a year after the initial ban, Garena announced in August that Freefire would return to the Indian market, suggesting that the ban has been lifted. The gaming company will host its Indian data in an Indian cloud provider to meet data privacy requirements. It initially planned to launch the game in September but postponed the launch -- date not announced yet -- to refine gameplay and improve localization .
As a shareholder, I'm hopeful that Garena can successfully relaunch Freefire shortly. Still, investors should remain patient since the company would take a while to build up its user base in India, and monetization would come even later.
What it means for investors
After a massive decline in revenue and profitability, Garena seems to have found a floor lately. QAU has stabilized, and bookings have grown again. Moreover, the reentry into the Indian market could give Garena the boost it badly needed to rekindle growth thanks to the enormous opportunity in a country with such a large population.
The next few quarters will be crucial for Garena to prove that its recent performance is sustainable and that a recovery is ongoing. Investors should closely monitor key metrics such as bookings, MAU, and average revenue per user in the coming quarters.
