Sea Limited (SE 0.05%) is often overlooked in the universe of e-commerce conglomerates. Although it is a much younger, smaller company than Amazon, its Shopee e-commerce arm holds a market lead in Southeast Asia. And like MercadoLibre, it operates a fintech business.
However, Sea Limited often gets overlooked in favor of Alibaba and other China-based conglomerates. Moreover, its gaming business has struggled, and investors seem to have focused on the negative.
Does that mean an investor should buy before more investors recognize the entertainment stock's potential? Let's take a closer look.
Where Sea Limited sails smoothly
At first glance, it is easy to see Sea Limited as the "Amazon of Southeast Asia." Shopee continues to lead in Southeast Asia, a market investors have overlooked. Also, comparing its $20 billion market cap to Amazon's market cap of $1.6 trillion may imply more untapped growth potential for Sea Limited stock.
Indeed, overlooking that market is likely a mistake. The seven Southeast Asian countries that are the core of Shopee's market have a combined population of more than 600 million. While not as large as China at 1.4 billion, that is almost twice the population of the U.S.
Additionally, it consists of wealthy markets like Singapore and fast-growing developing markets such as Vietnam and Thailand, which can serve as growth engines. It also operates in Brazil and maintains a limited operation in three other Latin American countries.
Furthermore, Sea Limited had the same challenges as MercadoLibre with online selling to cash-based customers. But like its Latin American counterpart, it has formed a fintech arm, SeaMoney, that is now the fastest-growing part of the business.
Gaming cannot escape rough waters
However, as mentioned, its struggles come from its original business: gaming segment Garena.
During the pandemic, Free Fire became the world's most downloaded mobile game. But the end of the pandemic and a ban in India reduced the game's popularity. And just as its return to India appeared imminent, Alphabet's Google Play removed the Indian version of the game from its store in December, leaving its future in doubt.
Ultimately, Garena's revenue dropped 43% yearly in the first nine months of 2023. In comparison, the other two business segments reported a combined growth rate of 34% during the same period.
Fortunately, gaming made up less than 18% of the company's revenue during this period, reducing the impact of its massive decline. Garena also reported 12% revenue growth in the third quarter of 2023 versus the previous quarter, implying the worst may be over.
Sea Limited's financials
In the first nine months of 2023, Sea's overall revenue of $9.4 billion was up 5% versus the same period in 2022. Despite perceptions implied by the aforementioned market cap comparison, Amazon grew net sales by 11% over the same time frame.
Moreover, Garena's performance may lead to investors overlooking some key positives for the company. In the first nine months of 2023, free cash flow was more than $1.6 billion, a dramatic turnaround from the negative free cash flow of approximately $2.5 billion during the same period in 2022.
Furthermore, despite the stock losing more than 35% of its value over the last year, the P/E ratio of 31 is far below that of Amazon or MercadoLibre. This likely means that once Garena can move past its struggles, the stock can begin to grow again.
SE PE Ratio data by YCharts
Investing in Sea Limited stock
At current levels, it is unclear whether Sea Limited is the "next Amazon," but it looks increasingly like a stock to buy. Admittedly, Garena's challenges should rightly concern investors. With gaming being its original business, that might lead to questions about the company's identity.
However, investors should remember that most of its revenue now comes from e-commerce and fintech. As those segments of the company continue to prosper, they could experience growth reminiscent of Amazon.
Moreover, its comparatively low P/E ratio should bode well for the stock. As investors pay more attention to Asia outside of China, Southeast Asia's demographics and growth rates could attract more investors to Sea Limited stock.
