Running a business in online gaming and E-commerce which remained resilient during the pandemic, Sea Limited (NYSE: SE) had a tremendous performance in FY2020. As a result of this, its share price has also seen a similar rise in 2020, outperforming its competitors like Alibaba and Amazon.
Source: Trading View
However, during the recent tech sell down, Sea Limited’s share price had dropped by more than one-fifth of its market value.
p.s. SEA released their latest 4q21 earning results, read our analysis here.
With Sea share price trading at a discount from its high, is it a good time to buy?
What does Sea Limited do?
Sea Limited was initially known as Garena, an online game developer and publisher in 2009. As they eventually venture out to the e-commerce business, Garena was eventually renamed Sea Limited.
Sea Limited is now a leading global consumer internet company operating in 3 core businesses mainly in the Southeast Asia region namely digital entertainment (Garena), e-commerce (Shopee), as well as digital payments and financial services (SeaMoney).
Digital Entertainment (Garena)
The first business of Sea Limited is Garena.
Garena started as a game publisher which publishes games developed by 3rd parties. You may have heard of BlackShot or played it before when you were a kid. BlackShot was one of the first games published by Garena back in 2009. While the game is still online, Garena no longer supports it as it was returned back to its developers, Vertigo Games after failed talks regarding the terms for the renewal of the license.
At the present, while Garena still exclusively licenses and distributes games developed by 3rd parties like League of Legends, FIFA Online 4, and Call of Duty, they have also started to develop their own games in house.
In 2019, Garena launched its first mobile game Free Fire, a mobile battle royale game. Free Fire was well received worldwide and was the most downloaded mobile game globally in 2019 and 2020.
It was also the 2nd most popular mobile e-sport game in 2020, just right behind PUBG, its biggest rival. PUBG Mobile was banned in India at the end of Q3 2020 which has greatly benefited Free Fire as many gamers in India switched over.
Moving forward, we can expect more in-house games to be produced by Garena themselves. To strengthen its positions, Sea Limited has recently acquired Phoenix Labs, a US-based game developer to enhance its in-house content creation.
If Sea Limited can produce more popular games like Free Fire in-house, they would be able to improve their profit margins going forward as Garena would not have to pay hefty licensing fees to the developer. This bodes well for the future of Sea Limited.
In addition to publishing games, Garena is also a leading esports organizer. It hosts e-sports events around the world that range from grassroots local tournaments to some of the most viewed professional esports competitions globally.
E-commerce (Shopee)
Launched in 2015, Shopee had entered a highly competitive market with Lazada already taking the lead in the region. However, as we have seen over the years, Shopee eventually outpaced the growth of all other e-commerce platforms in the region and became the most visited e-commerce platform in Southeast Asia.
Apart from Lazada, other competitors in the e-commerce space include Tokopedia, Qoo10, and Taobao (Lazada and Taobao are owned by Alibaba Group). Here is a table of the top shopping apps in the respective Southeast Asia Market that Shopee is in.
Source: iprice.sg
I was pleasantly surprised by Shopee’s standings in the table. Although Shopee was late to the game, it currently tops all the 6 Southeast Asian countries it operates in, for Q4 2020. While there are some close competitions like Tokopedia in Indonesia which is not far behind Shopee, given that Shopee was just formed, this result is impressive.
Shopee’s growth could be due to the way they approached the market. Unlike its competitors, Shopee started with its mobile app to take advantage of Southeast Asia’s high mobile penetration rate. This stems from the belief that mobile app users tend to be more loyal and spend more money per order than web users.
Apart from that, Shopee understood the diverse population it is operating in. Unlike its competitors which have one common app for all its users, Shopee developed different stand-alone e-commerce apps for different markets. This allows them to launch hyper localised promotions that cater to the local markets. For example, the Thailand and Vietnam hold high regard towards celebrity endorsers, as such Shopee Thailand and Shopee Vietnam invited local actors and models as their endorsers to promote Shopee’s products. On the other hand, as Singaporeans and Malaysians were more receptive to discounts and flash sales, regular discounts were given to attract customers.
With the gamification of its apps and rolling out of new features like Shopee Live and Shopee Feed. Shopee has managed to keep its customers satisfied and have returned to its platform for more.
Digital Financial services (SeaMoney)
Established in 2014, SeaMoney is a digital payment and financial service provider in Southeast Asia.
SeaMoney’s offering includes mobile wallet services, payment processing, credit, and related digital financial services and products.
As of 2021, SeaMoney makes up the smallest percentage of Sea Limited’s total revenue. However moving forward, we expect to see more growth in this sector as Sea Limited continues to expand SeaMoney with the most recent news regarding the successful bidding for Singapore’s digital full banking license.
Have Sea Limited been making money?
Sea revenue has been growing at an immense speed over the years and has even accelerated over the last few quarters due to Covid-19. The group’s total GAAP revenue was US$4.4 billion, up 101.1% year on year.
This revenue growth is supported by a 77.5% year-on-year growth of its digital entertainment arm and a 159.8% year-on-year growth of its E-commerce arm.
While Sea Limited’s revenue has been increasing for the past 3 years since its IPO in 2017, Sea Limited has yet to be profitable. This is due to its efforts to expand its market share.
Its E-commerce arm and Digital Financial Service arm have been spending a lot on advertisements to attract new users. In FY2020 alone, its E-commerce arm and digital financial services arm took in a loss of US$1.5 billion and US$0.5 billion respectively.
The silver lining is that its digital entertainment arms received a profit of US$1 billion (not account thing for another close to US$1 billion in deferred revenue). This profit from its digital entertainment has helped to cushion the loss incurred by the other 2 arms of Sea Limited as they continue to gain market share.
All in all, Sea Limited has still made a net loss in FY2020 after accounting for marketing expenses and other general expenses.
Sea Limited’s Financial Strength
Good news, over the years, Sea Limited’s cash and cash equivalents have increased.
Cash and cash equivalents are assets that are cash or can be converted into cash immediately if needed. Some examples include bank accounts and marketable securities. With a healthy amount of cash and cash equivalents, Sea Limited would be able to meet their short-term debt obligations easily and also provide enough working capital for expansion.
However, do note that most of the increase in its cash is due to equity financing rather than from its core business. In fact, in Dec 2020, Sea Limited has raised US$2.57 billion from its secondary stock offering.
This raises the concern regarding the rate of cash burned by Sea Limited. However, looking at its balance sheet, I feel that at its current growth rate, the cash burn is more than justified. Nonetheless, as Sea Limited solidify its market dominance, I expect them to reduce their expenditure and start to generate positive cash from their operating activities (minus investing activities).
Its current ratio of 1.93 is rather low. However, given that it is still more than 1, it is safe to say that Sea Limited still has the ability to pay its short-term loans with ease. In addition, if we were to compare with its competitors like Alibaba which has a current ratio of 1.67, and Amazon which has a current ratio of 1.05, it is safe to say, Sea Limited’s current ratio is healthy.
Does Sea Limited still have room to grow?
Let’s take a closer look at Southeast Asia where Sea Limited mainly operates.
The infographics below show the demographics where Sea Limited is operating in and also the growth of new users joining the internet. You can see that the growth potentials in this region remain plentiful.
Covid-19 pandemic has led to an acceleration of users joining online. While this was great for businesses like Sea Limited during the pandemic, I was initially concern that after the rollout of the vaccine, we would see the numbers of digital consumers return to pre-Covid levels.
However, from the studies done by Google in collaboration with Temasek and Bain & Company, it seems that this new digital acceleration is sticky. Out of those surveyed, 94% of new digital service consumers intend to continue with their online service post-pandemic.
Looking at e-commerce specifically, we see that the usage of online platforms are higher than pre-Covid, which bodes well for e-commerce companies like Sea Limited.
Moving forward the long-term outlook of Sea Limited is promising.
Coming out of the pandemic, Southeast Asia’s internet economy is expected to grow by 24% CAGR by 2025 with a Gross Merchandise Value of US $309 Billion. Looking at the breakdown of individual Southeast Asia countries, we could see all of the countries’ percentage growth CAGR in the internet economy are double-digit.
This gives us a sense that the addressable market Sea Limited is in will get bigger in the coming years. This would translate into higher revenue for the company if they can ride the growth of the region.
Looking at the e-Commerce sector, we can expect a 23% CAGR which will almost triple the GMV of 2020 when projected to 2025. I believe this growth would continue as more businesses have now understood the benefits of going online and have started to digitalise their business.
Sea Limited’s digital payment arm also has a positive outlook moving forward. With Sea group clinching one of the 2 digital full bank licenses in Singapore, it will be interesting to see how SeaMoney grows in the coming years.
Understandably that with a small population size, the growth for SeaMoney is limited here in Singapore. That being said, I believe that Singapore is a good launching pad for Sea Limited. If they are able to successfully roll out their digital banking in Singapore, I am confident that they could easily scale it up to other SEA countries, increasing its addressable market by a few folds.
I am also not discounting the fact that SeaMoney could become as successful as that of Kakao Bank Corp, a South Korean digital bank that has over 34 million users (more than 50% of its population) and also became profitable after less than 2 years of operation. Of course, this may be unique to South Korea and may not apply to Singapore, however, I hope this example sheds light on the potential of this sector.
Going forward, Sea Limited has issued profit guidance for the year 2021.
They are expecting bookings for digital entertainment to grow 38.1% year on year while their E-commerce to grow by 112.3% from 2020.
Sea Limited’s Risks
Of course, like all investments, Sea Limited has its risk:
Stiff competition
Given the huge potential in Southeast Asia, many companies will want a share it. As such, Sea Limited faces fierce competition from companies like Alibaba (E-commerce) and Grab (Financial Service).
This competitive environment could continue to affect Sea Limited’s profitability going forward as these companies fight for market dominance. This competitive environment also calls into question if Sea Limited can continue to sustain its business without being profitable.
Share dilution
To sustain its growth, Sea Limited has been constantly issuing new shares to raise cash from the equity market over the years. As a result, current shareholders’ holdings have been diluted a few times. If you are planning to own Sea Limited share, do take note of this dilution.
Over valuation
Compared to its peers, Sea Limited is trading at a higher premium given the high growth potential it has. More on that in the next section.
How much is Sea Limited worth today?
At a current share price of US$223, Sea Limited has a Price to Sales ratio of 17.22 which is rather high as compared to its counterparts like Alibaba (PS = 6.69) and Amazon (PS = 4).
Source: TradingView
However, if we were to account for the growth in their revenue for FY2020, I feel that Sea Limited’s current valuation is justified.
If we look at the Price/Sales-to-growth ratio (PSG), a modified version of Price Earnings Growth Rate (PEG), Sea’s PSG is around 0.17 while Alibaba is at 0.21 and Amazon is at 0.11
Source: vulcanpost.com
My opinion
The journey ahead could be bumpy. However, I believe with the current trajectory, Sea Limited will dominate the Asia market very soon. Given that Sea Limited is in 3 of the high-growth sectors namely Gaming, E-commerce and Fintech, I believe this tech giant could potentially generate multi-bagger returns for investors willing to take the risk now. As an investor, you could consider buying Sea Limited when their share price dips and ride it out for the long term.
If you’re interested in further reading, take a look at this article on which explain how Shopee overtook Lazada in Southeast Asia. This is a good read as it gives you a greater understanding of why Shopee was able to thrive.
I currently do not own any share of Sea Limited.