This tech big is making a stable comeback.
Sea Restricted (SE 3.51%) has been one of the crucial fascinating tech corporations to observe for the previous couple of years.
At one level, it was a progress darling that almost all traders liked, sending its inventory to a excessive of $367 in the course of the COVID-19 pandemic lockdown in 2021. But, a sequence of missteps and uncontrolled losses amid its international ambitions despatched the inventory down by greater than 90% from its peak within the subsequent two years.
Nevertheless, as Sea went by way of its transformation course of, it positioned itself to develop extra sustainably. This new technique has gained investor approval, which explains the stable 200% rise in inventory worth during the last 12 months.
Picture supply: Getty Photographs.
A number one tech firm in Southeast Asia
Based as a gaming firm, Sea has adopted within the footsteps of main tech Chinese language corporations like Alibaba and Tencent by diversifying its enterprise into new areas. It now runs a three-pronged enterprise mannequin throughout e-commerce, gaming, and fintech.
Its e-commerce enterprise, Shopee, is a number one market in Southeast Asia, Taiwan, and Brazil, occupying one of many high three positions in nearly all of its markets. This enterprise generates income primarily by way of market commissions, promoting, and transaction charges (primarily from logistics and success).
Garena, its gaming arm, develops and publishes cellular video games, notably Free Hearth. It additionally companions with main gaming corporations like Tencent to publish the latter’s video games in chosen geographies. Sea Cash, the fintech arm, provides digital monetary providers like cellular wallets, digital banking, lending, and buy-now-pay-later providers to customers in Southeast Asia.
Whereas every enterprise operates independently, Sea leverages every enterprise’s strengths to enhance the remaining. As an example, the tech firm reinvested Garena’s income within the early days to accumulate new customers within the e-commerce phase. Equally, Sea Cash leverages Shopee’s enormous e-commerce ecosystem to accumulate new customers and launch new providers.
An enormous comeback in the previous couple of years
Sea has been an aggressive progress firm for many of its existence, scaling its companies throughout Southeast Asia. Notably, Shopee went from nothing in 2015 to turn into the biggest e-commerce platform in Southeast Asia due to its growth-at-all-costs technique. Shopee’s income surged by 160% in 2020, adopted by one other 136% in 2021.
This aggressive technique was obligatory for Shopee to achieve economies of scale however got here at a substantial price to the corporate. It needed to depend on Garena’s income and exterior funding to maintain its progress machine spinning, because it was closely subsidizing customers by providing free deliveries. For perspective, Shopee’s adjusted earnings earlier than curiosity, tax, depreciation and amortization (EBITDA) was adverse $2.6 billion in 2021. Nevertheless, such an growth technique hit a roadblock in 2022 as Garena’s income fell and exterior funding dried up.
Shopee needed to rationalize its subsidies, minimize prices, and cut back its growth ambitions by exiting loss-making markets like India and Europe. Luckily, these efforts succeeded in serving to Shopee ship a optimistic adjusted EBITDA of $196 million within the fourth quarter of 2022. By delivering a optimistic EBITDA, Shopee demonstrated the viability of its enterprise mannequin. Extra importantly, it gave Sea the arrogance to reinvest in progress once more however at a extra manageable charge within the following quarters.
Up to now, Sea’s new technique is working, as income grew by 31% to $4.3 billion, and internet revenue got here in at a optimistic of $153 million in 2024’s third quarter. It additionally ended Q3 with $9.9 billion in money, money equivalents, short-term investments, and different treasury investments.
A sea of alternative forward
With Sea’s funds again in form, the tech big is well-positioned to proceed rising for the following few years. On one hand, the e-commerce arm can proceed to develop because it leverages the continued enhance in on-line penetration in Southeast Asia and Brazil. Shopee’s rising scale ought to give it ample alternatives to extend {the marketplace}’s take charge by way of charges, promoting earnings, and different complementary providers like logistics providers.
Equally, Sea Cash is quickly increasing its monetary providers by leveraging Shopee’s intensive person base. It provides digital wallets, loans, insurance coverage, and different merchandise to fulfill its customers. In sure international locations like Singapore and Indonesia, Sea Cash has secured a banking license to supply digital banking providers to its clients.
Whereas Garena’s prospects aren’t as clear-cut as the opposite two segments, it has just lately began rising once more. Bookings grew 24% in 2024’s third quarter, due to Free Hearth‘s robust efficiency. If Garena can maintain this development, it can present Sea with a 3rd avenue to develop within the coming years.
In brief, there are many alternatives for Sea to maintain its progress machine sooner or later!
What it means for traders
Sea has come a great distance from its meteoric rise, sharp decline, and subsequent restoration. It has realized invaluable classes from its missteps and is now prioritizing sustainable progress over reckless growth. If it continues successfully executing its technique, it may as soon as once more turn into one of many top-performing tech shares within the coming years.
All stated, it pays to control this firm.
