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Sea Limited (NYSE: $SE) – Should You Ride the Wave?

Sea LimitedSea Limited (NYSE: $SE) continues its rapid rise despite remaining unprofitable. While risky, massive growth opportunities in gaming, e-commerce, and fintech make Sea worth a look.

Singaporean internet company Sea Limited has been on fire lately. Propelled by its increasing market dominance in Southeast Asia, shares shot up more than 400% over the past year. Although Sea trades at an undeniable premium, multiple factors indicate that it still has room to run.

The story behind Sea’s growth

The COVID-19 pandemic is accelerating multiple internet trends. With more people staying home than ever before, online shopping and gaming have skyrocketed in popularity. The transition from cash to online payments is gaining similar momentum. With branches in e-commerce, gaming, and fintech, Sea Limited is capitalizing on all three of these trends, fueling its enormous growth over the past year.

To understand Sea’s strength, let’s take a look at its business model. Under one integrated platform, Sea operates three subsidiary companies: Garena, Shopee, and SeaMoney.

Garena is Sea’s digital entertainment and gaming division. Notably, its game Free Fire became the most downloaded mobile game globally in 2020. Garena is Sea’s most profitable subsidiary, and the company’s digital entertainment revenue increased 146% over the past year. Sea uses Garena’s profitability to fuel the growth of its e-commerce sector and offset losses in other areas.

Shopee is Sea’s e-commerce platform. Since its launch in 2015, it has grown to become the dominant e-commerce force in Southeast Asia and Taiwan. Shopee now appears to be considering expansion into Latin America, where it could challenge e-commerce giant MercadoLibre. Although it has expanded significantly over the past year, Shopee still remains unprofitable

SeaMoney is a digital payments platform. Its digital payment services are integrated with Shopee, streamlining Sea’s operations. Although SeaMoney is currently Sea’s smallest subsidiary, it is growing rapidly. Its paying user base grew to 17.8 million users in the third quarter of 2020, up from 10 million in the first quarter.

Sea’s increasing market dominance has spurred eye-popping revenue growth. Sea reported a 98.7% increase in revenue year-over-year in the third quarter of 2020. Sea’s addressable market is only expected to expand, as the Southeast Asian internet economy is projected to surpass $300 billion in 2025. Sea’s dominant footholds in multiple digital growth areas set it up for significant opportunities in the near future.

Considerable risks accompany Sea’s growth

Despite Sea’s momentum and potential, the company carries a number of risks. The most pressing is its lack of profitability.

Sea is currently employing a strategy of aggressive expansion into new markets. To fuel this expansion, the company increased its research and development expenses by a dramatic 139.3% in the third quarter of 2020, while increasing marketing and sales expenses by 87.1%.

Coupled with Sea’s prioritization of growth, however, is a sacrifice of profitability. In the third quarter, Sea’s net losses increased by a significant 106.3%. Sea’s aggressive spending on research and development, as well as marketing and sales, is largely responsible for its lack of profitability.

Sea’s focus on rapid expansion is enabled by the profits of its gaming division, Garena, which subsidizes the losses of its other subsidiaries. However, the sustainability of Garena’s current revenue growth is not guaranteed. Much of Garena’s recent growth can be attributed to the surge in gaming caused by COVID-19 lockdowns. Once restrictions lift, it is possible that this could subside, causing Garena’s recent revenue gains to flatten out or decline. 

A decrease in Garena’s revenue would limit its ability to subsidize Shopee and SeaMoney. Because Shopee is still facing deep losses, this could have significant consequences for Sea. 

Even if Garena’s growth remains strong, Sea has a long way to go before it becomes profitable. A key question is whether the company will be able to achieve profitability while maintaining its growth, or if the two are mutually exclusive under its current model.

Another risk for Sea is competition. Each of Sea’s subsidiaries faces challenges from a number of competitors. Shopee must contend with e-commerce competition from the Alibaba-backed company Lazada, while Garena faces powerful gaming competitors such as Activision Blizzard (NYSE: $ACTI) and Electronic Arts (NYSE: $EA). Increasingly tough competition threatens to chip away at Sea’s market share. Even with growing competitive pressure, Sea remains a dominant force in Southeast Asia.

What’s Next?

With strong footholds in gaming, e-commerce, and fintech, Sea has grown at an astonishing rate. Southeast Asia’s internet economy is rapidly expanding, providing Sea with an ever-larger market. Given the momentum of Sea’s subsidiaries and its growing addressable market, Sea has the potential to continue accelerating its rise. 

However, coupled with Sea’s huge reward potential are undeniable risks, namely its lack of profitability and growing competition. And at already sky-high valuations, any slowdown in Sea’s growth could have consequences. 

Ultimately, if Sea can succeed in staving off competition and reaching profitability, it seems to have a promising continuation of growth ahead.

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