Amazon started out in 1994 selling books online, and today, it dominates the entire e-commerce industry. However, the company has also expanded into other areas like streaming, digital advertising, and cloud computing.
The stock has soared over the past decade, and while e-commerce remains the company's largest source of revenue, its other segments are making notable contributions to its profits and success.
Sea Limited (SE +1.03%) bears a striking resemblance to Amazon in the latter's earlier days. It draws most of its revenue from e-commerce, but it has also moved into other areas of the technology sector like digital entertainment (gaming) and digital financial services.
Trading at about $59 per share, Sea is valued at $33.5 billion as of this writing, and its stock has the potential to rise tenfold over the next decade. Investors who missed out on Amazon might want to pounce on this opportunity.
The Amazon of Asia?
Amazon founder Jeff Bezos saw the shift to online shopping before most other people. The internet delivers unmatched convenience to consumers, and the trend toward digitization will likely continue long into the future. Sea is based in Singapore, and it serves Southeast Asian markets like Indonesia, which are at earlier stages of the e-commerce transition compared to mature markets like the U.S.
Sea's Shopee app is a hybrid consumer-to-consumer and business-to-consumer e-commerce platform, and it's responsible for most of the company's revenue. Like Amazon, Shopee is focusing heavily on reducing logistics costs and improving delivery speeds at the moment. In the fourth quarter of 2023, management said the company lowered its logistics cost per order by 12% in Asia (year over year), thanks to more automation and operational improvements.
In Indonesia's economic center of Java, Sea said more than half of e-commerce orders were delivered within two days during the month of December.
But Sea's digital entertainment segment, which is home to the Garena game development studio, continues to be a drag on the company overall. It's responsible for popular titles like Free Fire and Call of Duty: Mobile. Activity peaked at the height of the pandemic, and Garena's quarterly active user metric has steadily declined since then, taking revenue down with it.
On a positive note, Free Fire was the most downloaded mobile game in the world during 2023, and management says the momentum has continued into 2024 so far. Plus, Garena's 528.7 million quarterly active users in Q4 increased 8.9% year over year, which is a good sign the worst might be over.
Finally, Sea Money is the driving force behind Sea's fintech business. It offers digital banking services and small loans to consumers, including the buy now, pay later format. But it also finances merchants to help them scale their businesses on the Shopee platform, which in-turn benefits the company's e-commerce segment.
Sea Limited's revenue growth decelerated in 2023, but there's more to the story
Sea generated a record-high $13.1 billion in revenue during 2023, but it was a year-over-year jump of just under 5%, down from the 25% growth it delivered in 2022 and the 127% growth it posted in 2021.
Most of the slowdown was attributable to the digital entertainment segment, which saw a 44% decline in revenue last year. On the other hand, e-commerce revenue grew 24%, and digital financial services revenue soared 44%. Digital financial services is the smallest of Sea's three segments with $1.8 billion in 2023 revenue, but it's quickly catching up to digital entertainment ($2.2 billion) due to the huge difference in growth rates.
However, the company actually engineered the deceleration in its overall 2023 revenue by cutting costs to deliver profitability.
Sea's operating expenses shrank 16% last year, which resulted in $162.7 million in net income. That was a huge swing from the $1.6 billion net loss from 2022 -- and it was also the company's first-ever annual profit.
Sea's profitability on a quarterly basis is still lumpy. However, Wall Street thinks the company will grow its revenue at an accelerated rate of about 13% this year, which should help boost the bottom line (assuming operating margins don't deteriorate).
NYSE: SE
Key Data Points
Why Sea Limited could soar tenfold over the long term
As I mentioned, Sea is valued at $33.5 billion. Based on the company's $13.1 billion in 2023 revenue, its stock trades at a price-to-sales (P/S) ratio of just 2.6. That's near the cheapest level since it went public in 2017, and it's far below its peak P/S ratio of 22.9.
That peak valuation was unsustainable, and so was the company's triple-digit revenue growth in past years. However, if Sea can return its revenue growth to 20% on average over the next decade, it could be generating $81 billion of annual revenue by 2034.
At its current P/S ratio, that would value the company at $211 billion. But there's also the potential for multiple expansion, meaning investors could ascribe a higher P/S ratio to the stock on the back of more consistent growth and profits. Its peak P/S ratio of nearly 23 is almost certainly off the table, but an uptick to 4.1 would value the company at $335 billion.
That translates into a tenfold return from here. There is precedent: Amazon has grown its revenue at a compound annual rate of 23% over the past decade. Its P/S ratio has also nearly doubled over the past year alone due to stronger revenue and more favorable economic conditions.
To be clear, several things have to go right for the above scenario to play out -- Sea's overall revenue growth returning to at least 20% being the most critical hurdle. But we know its e-commerce and financial services segments are already expanding well beyond that threshold, and its gaming business is showing signs of recovery.
Therefore, investors who missed out on the massive run in Amazon since 2014 might find a comparable opportunity in Sea Limited stock if they buy it today.
