Sea Limited (SE 0.05%) has experienced struggles that its counterparts in other parts of the world have avoided. The Singapore-based company has become the Amazon of Southeast Asia even as the e-commerce conglomerate missed the recovery that benefited Amazon and its Latin American peer MercadoLibre.
Unlike these competitors, Sea Limited operates a gaming division, which was its original business. The question for its long-term investors is whether any of these struggles will make a difference five years from now.
Two of Sea Limited's segments continue to prosper
No matter where Sea Limited is in five years, it starts from a relatively strong position. The company has long been the largest e-commerce company in Southeast Asia. It is widening its competitive moat in this area by expanding its logistics network, opening five new sorting centers and 385 new, first and last-mile sorting centers in the region.
Additionally, on the fourth-quarter 2023 earnings call, the company announced that it reduced its contribution-margin loss in Brazil, its largest non-Asian market, by more than 90%. This news is encouraging as this division, called Shopee, shows it can compete in non-core markets, which bodes well for its possible status five years from now.
In 2023, gross-merchandise volume for Shopee rose 29% yearly, with a 46% increase in orders during the same period. Moreover, since it operates in developing nations, revenue could continue to improve as Southeast Asia continues to grow economically.
In its digital financial-services segment, SeaMoney, the SME (small and medium enterprise) credit business, led the way, providing increasing loan volume to such enterprises.
It also reported growth in its banking and insurance operations, allowing SeaMoney to become the company's fastest-growing segment. Given the developing nature of most of SeaMoney's markets in Southeast Asia, there exists a high likelihood of continuing on this path for years to come.
Garena's performance points to significant uncertainty
Indeed, the struggles continue for Garena, its gaming division. Much of its success continues to revolve around Free Fire, which is again the world's most-downloaded mobile game.
However, none of Garena's other games have stood out. And even with Free Fire, the anticipated relaunch in India has not yet occurred. India, a country of 1.4 billion people, banned Free Fire in 2022, and the company has since worked with regulators to bring it back to that market. Regaining access to India should boost Free Fire and Garena by extension, but the lack of success with other games makes Garena's position in future years difficult to predict.
Sea's financials
Garena also presents the most challenges for Sea's future. With the prosperity of Shopee and SeaMoney, these segments grew revenue by 24% and 44%, respectively, in 2023. Still, since Garena's 2023 revenue dropped 44% during that period, overall revenue grew by just 5% to $13.1 billion.
Fortunately, operating expenses fell during that time, ultimately allowing Sea to earn a net income of $163 million, its first yearly profit. This lack of dependence on outside funding means Sea's optionality increases as it faces its future.
Additionally, amid a bull and bear market, Sea Limited stock rose by more than 130% over the last five years. The good news for current investors is that the increase occurred without any yearly profit until the end. Since the stock experienced gains as high as 2,100% during the bull market, the next five years stand a chance of serving Sea investors well.
Another factor working in buyers' favor is valuation. As measured by the price-to-sales (P/S) ratio, investors can buy the stock at just over two times earnings. And despite being newly profitable, its forward price-to-earnings (P/E) ratio recently was only 47. Such a valuation could serve investors well if Garena improves and its other segments stay the course.
Sea Limited in five years
Although anything can happen over the next five years, present trends bode well for the stock. In Southeast Asia, Sea Limited leads in e-commerce as it reinforces its competitive moat in its home region and the outlook in Brazil continues to improve. Moreover, SeaMoney remains its fastest-growing segment and will likely continue to bolster the company in the future.
Admittedly, Garena's massive revenue decline and dependence on Free Fire make predicting that segment's future difficult. Nonetheless, if present trends continue, Garena's performance could become less important to the entertainment stock, allowing Sea's other two segments to drive company growth. Such trends should take the stock price higher over time.
