Summary
Garena, Sea’s only profitable segment, serves as a lifeline for its other two segments, but Bookings are expected to fall sharply in FY2022.
In addition, Shopee's losses are widening. However, the e-commerce segment is expected to be self-funded by 2025. This is achievable as take rates are trending in the right direction.
SeaMonkey is also gaining traction at an unprecedented pace, a monster lurking in the shadows. Investors should pay attention as this segment could serve as Sea's second cash cow.
With a net cash position of $5.9 billion and $(3.6) billion of estimated AEBITDA in FY2022, it won't be long before Sea requires another cash infusion.
Despite unprofitability risks, Sea has a strong brand, network effects, and barriers to entry moats. The stock is trading at the lowest multiple ever - it is worth a nibble at these prices.
Investment Thesis
Sea is at the forefront of the internet revolution in developing regions. This had many investors buying into the growth story of the company, sending shares soaring high into the sun for the better part of 2020 and 2021. However, the stock has cratered back to sea amid concerns about the company's slowing growth, especially for its only cash cow, Garena. To make matters worse, Shopee's losses are also getting worse.
The Group's cash burn rate is still high, estimated to be $(3.6) billion in FY2022. With a net cash position of $5.9 billion, future capital raises are very likely.
On the bright side, Sea still has a long growth runway ahead, solidified by its leadership positions in Southeast Asia and Latin America. SeaMoney, although still unprofitable, could also emerge as Sea's second cash cow.
Despite unprofitability and competitive risks, Sea has strong competitive moats and it is trading at the cheapest valuation multiples since its IPO.
The three-headed monster is a Buy at these levels.
Garena
Its digital entertainment division, Garena, was Sea's first business venture. In fact, Sea was originally named Garena Interactive Holding Limited before changing its name to Sea Limited in 2017.
Garena is one of the largest online games developers and publishers, releasing some of the most successful mobile and PC games over the last decade. For example, Garena's Free Fire, its self-developed mobile battle royale game, topped the global download charts for the last three years. According todata.ai, Free Fire also ranked second globally by average monthly active users on Google Play in 2021. In Southeast Asia and Latin America, Free Fire was the highest-grossing mobile game for ten consecutive quarters, and in the US for four consecutive quarters. Based onSensor Tower's findings, Free Fire still holds the most downloads globally as of January 2022.
Garena also exclusively licenses and publishes games from global partners and third-party developers. Some of these partners include Tencent (OTCPK:TCEHY), Activision (ATVI), and Arumgames. Games like Speed Drifters, Arena of Valor, and Fantasy Town fall into this category as they are co-developed with partners or licensed from partners.
Shopee
Perhaps the most exciting business segment is Sea's mobile-centric e-commerce platform, Shopee. Launched in 2015, Shopee is now one of the fastest-growing e-commerce marketplaces with a strong presence in Southeast Asia, as well as growing recognition in Latin America and some European countries.
Through the Shopee platform, buyers can purchase items from sellers which are primarily small and medium businesses (or mom-and-pop stores). At the same time, larger, more established retailers like Xiaomi (OTCPK:XIACF), Microsoft (MSFT), or Samsung (OTC:SSNLF) can leverage Shopee's two premium shopping platforms, Shopee Mall and Shopee Premium.
Shopee's scale is unmatched and it is still growing at an unprecedented pace. According to data.ai, Shopee in Southeast Asia and Taiwan ranked first in average monthly active users and total time spent in the app in 2021. Shopee Indonesia, arguably Shopee's most important market, ranked first in the Shopping category. Shopee Brazil, which launched in October 2019, was also ranked first in the Shopping category. And globally, Shopee ranked first in the Shopping category, and is the #13 most downloaded app regardless of category, logging in 200+ million downloads in 2021.
SeaMoney
SeaMoney was launched in 2014 and is now one of the leading digital financial services providers in Sea's operating countries. SeaMoney offers mobile wallet services, payment processing, credit, and other digital financial services. These services are offered under SeaMoney's various brands including AirPay, ShopeePay, SPayLater, and other local brands depending on the country. SeaMoney was initially launched in Vietnam and Thailand but has since expanded to other regions.
Through SeaMoney's mobile wallet offerings, consumers and merchants have added flexibility in terms of payment options, whether through online or offline means. The launch of SPayLater, which is basically a "buy now pay later" payment option, enables consumers to purchase items without accessing credit. For those who are interested, I've written adeep dive on Affirm (AFRM) where I discuss the main value propositions that BNPL provides.
SeaMoney has obtained bank licenses and government approvals to provide financial services in various countries. For example,Sea acquired Bank Kesejahteraan Ekonomi in Indonesia back in early 2021 as a push towards offering a digital banking solution. The company is now rebranded to SeaBank, which currently offers a high-yield savings account and virtual account.
SeaMoney's main value proposition lies in offering a mobile wallet and payment solutions that are integrated with Sea's other businesses, namely Garena and Shopee, enabling consumers and merchants to transact seamlessly in one vertically-integrated platform.
Market Opportunity
Sea's market opportunity is predicated around the industry outlook of each of its business segments: mobile gaming, e-commerce, and fintech. Let's take a look at each industry that Sea operates in.
First, we have the mobile gaming industry. According todata.ai, Mobile Game Consumer Spend grew from $74 billion in 2018 to $116 billion in 2021, while Mobile Game Downloads grew from 63 billion in 2018 to 83 billion in 2021. Among the Top Genres by Downloads were Hypercasual games such as Hair Challenge and Water Sort Puzzle. However, the Top Genres by Consumer Spend belong to the Strategy, RPG, and Shooting categories where Garena specializes in. For example, Free Fire was the top Shooting game by revenue in Thailand, Brazil, Mexico, and the US, in 2021. Globally, however, it is still behind PUBG Mobile, which generates the bulk of its revenue from China.
The mobile gaming industry is expected to reach $272 billion by 2030, which is about 1.5x of 2021's total figure. Given Garena's successes in monetizing its games, Garena should continue to enjoy gaming tailwinds in the foreseeable future, provided that its games remain in trend. This is also supported byUnity's findings that the APAC region is the fastest-growing regional market, a market that Garena dominates in.
Moving on to e-commerce, we all know that e-commerce is growing rapidly and that its market share as a whole will continue to trend up from here. This is especially true for the Southeast Asian region where internet and smartphone adoption continues to increase by the day. Based on thee-Conomy SEA report, Southeast Asia now has 440 million internet users, up from 360 million in 2019. Its total population is about 589 million.
Furthermore, Sea has recently expanded its e-commerce operations to other regions such as Latin America and Europe, which further expands its market opportunity.
Lastly, we have the fintech industry pertaining to SeaMoney. In my PayPal (PYPL)deep dive, I discussed the growth of mobile wallets as a payment method in both online and offline transactions. The shift to a cashless and cardless society is inevitable and that is also true for Sea's markets.
As you can see below, mobile wallets continue to gain traction in Southeast Asia. In addition, 92% of digital merchants intend to maintain usage or increase usage of digital payments in the next 1 to 2 years. ShopeePay and SeaMoney's other brands will benefit from this trend. Also of important note, SeaMoney's expansion to buy now pay later with SPayLater will be a key GMV and revenue driver for the segment. These are the reasons why some investors are so bullish on SeaMoney and why SeaMoney is a monster lurking in the shadows.
Coclusion
As you can see, Sea is at the forefront of three megatrends which should propel the business forward from here. Also, combining the different verticals in the same platform would present a significant synergistic opportunity as Sea establishes itself as a SuperApp in the making.$Sea Ltd(SE)$
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