Sea Limited (SE)

Investment Thesis

  • Dominant emerging market player in secular growth areas of gaming, e-commerce, and fintech.
  • For growth investors with high risk tolerance and very long term horizon.

Company Overview

  • Garena (gaming): Global online games publisher and developer. Self-published mobile game Free Fire is the most downloaded mobile game globally in 2020. Strong cash flow generation, growing active user and paying user base.
  • Shopee (e-commerce): Leading regional e-commerce platform in Southeast Asia and Taiwan. Rapid growth accelerated by the pandemic. Direct product sales.
  • SeaMoney (fintech): Digital payments and financial services provider, leveraging on Shopee user base. Offers e-wallet services, payments, digital credit cards. Operates as ShopeePay in Indonesia.

Bull Case

  • Leveraging strong cash flow and profitability from gaming to fund aggressive growth in e-commerce and fintech businesses.
  • Plenty of cash on hand ($11.8B as of Q3 2021) to fund growth cash burn. Raised $6B in Sep 2021 (read here).
  • Strong gaming and e-sports community in its self-developed game Free Fire.
  • Explosive e-commerce growth driven by pandemic tailwinds and secular trend towards online shopping.
  • Key region Southeast Asia is under-served and under-banked.
  • Total addressable market projected to grow from $100B in 2020 to $300B by 2025.
  • Adjusted EBITDA turned positive, solid cash position, FCF positive although still unprofitable.

Potential Catalysts

  • Digital full banking license in Singapore starting operations in 2022.
  • Sea Capital (through acquisition of Composite Capital Management) – potential bolt-on acquisitions to drive growth.
    • Sea invests in Singapore motion-capture gaming startup Refract’s S$8.5m round (read here)
    • Shopee parent Sea acquires Indonesia’s Bank BKE (read here)
  • Sea AI Labs – improved AI / ML applications throughout the business.

Risks / Concerns

  • No clear path to profitability of e-commerce business – widening losses with increasing scale.
  • Gaming revenue heavy reliance on a single mobile game Free Fire.
  • Lack of obvious synergies between gaming and e-commerce businesses, although synergies are emerging between e-commerce and digital payments.
  • Increasing competition from other SE Asia tech startups with more firepower as they go public. With the recent valuation contractions and market decline, startup competitors might find it more difficult to get funding especially at high valuations.

Competitors / Peers

  • E-commerce: Lazada (SE Asia), Gojek-Tokopedia (Indonesia), MercadoLibre (Latin America)
  • Fintech: Grab/Singtel (SE Asia)

Valuation

Disclaimer: These are my own estimates/projections, not a buy/sell recommendation. Please DYODD.

Current valuation vs competitors / peers:

Data as at 23rd June 2021SeaAmazonAlibabaTencent
Price~$280~$3500~$211~$74
Market cap$147B$1.77T$575B$711B
Revenue TTM$5.4B$419B$717B$509B
Quarterly rev growth yoy+147%+44%+64%+25%
P/S27x4.2x0.8x1.4x
P/E (trailing)N/A67x25x26x
Source: Yahoo Finance

Using a sum-of-parts valuation for its 3 divisions: Garena, Shopee, and SeaMoney.

  • Garena: 2021 projected bookings midpoint $4.4B (+38% yoy) at P/S 20x = $88B
  • Shopee: 2021 projected GAAP revenue midpoint $4.6B (+112% yoy) at P/S 20x = $92B
  • SeaMoney: Revenue not reported, but still only a very small part of the business

Altogether, projected market cap is $180B which translates to a target price of $343 per share (assuming no dilution).

Analyst Research

Tipranks average analyst PT as of 30th Jan 2022: $351.50 (implying 157% upside)

Source: Tipranks

Further Reading

Disclosure: I’m long SE

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