When Sea Limited (SE 0.05%) went public in 2017, it wasn't the e-commerce giant we know today. Then, it was mainly a gaming company, led by Garena, that was expanding into other markets like e-commerce and fintech.

In fact, Garena was the sole source of profits at Sea for many years and is still a major profit center today, even though the business has contracted massively from its pandemic-era peak.

Fortunately, there are signs things have stabilized for Garena, and it could finally be reversing that downward trend in 2024.

Garena has faced major headwinds the last few years

Garena was already doing well before the pandemic, but the business really took off when the COVID-19 hit. Demand went through the roof, fueled by a rapid increase in users. To put it into perspective, quarterly active users (QAU) totaled 402 million in Q1 2020 before surging to a peak of 729 million in Q3 2021.

But a series of setbacks caused the gaming company's business to dwindle in the next two years. A ban in India of its flagship Freefire game, the end of lockdowns, and poor management decisions on a few occasions were the main culprits.

Garena's fall from grace was fast and steep. From a peak of $1.2 billion in Q3 2021, bookings fell nearly two-thirds to $443 million by Q2 2023. Similarly, QAU reached a low of 486 million at the end of 2022. Consequently, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the digital entertainment segment declined from $2.8 billion in 2021 to just $921 million last year.

Garena's fall not only reduced Sea's overall profitability, but it also meant management could no longer rely on Garena's cash flow to fund the rapid expansion of its e-commerce business, Shopee. In short, it was a one-two punch for the company.

2024 could be an inflection point for Garena

But after two difficult years, Garena's recent performance suggests the worst could finally be over.

Bookings have gradually risen from the $443 million low in Q2 2023 to $456 million last quarter. QAU has also come in above 500 million in the last three quarters. Garena's Freefire was the most downloaded mobile game globally in 2023, according to Sensor Tower, with improved user acquisition and retention trends that should continue into 2024.

Still, the most convincing evidence of Garena's early recovery came from management's guidance. Sea believes Freefire can "grow double-digits year-on-year for both user base and bookings in 2024." If Garena delivers on this target, it could lead to the first full year of bookings growth after two years of decline.

The company is also preparing for the relaunch of Freefire in India, which could take place later this year. So far, the company hasn't provided an official date as it's still working to meet government requirements. But investors should keep a close eye on this effort since it will restore Garena's access to a massive market, providing a significant boost to its growth trajectory. Prior to the ban, India was the home to an estimated 40 million Freefire users.

What it means for investors

From its peak of $367, Sea Limited stock has fallen more than 80%. In the coming quarters, rising user counts, bookings, and profitability at Garena would go a long way in reassuring investors that Sea's long-term prospects remain intact.