January 12, 2024 - 11:56am EST by
2024 2025
Price: 37.11 EPS 1.22 0
Shares Out. (in M): 612 P/E 31 0
Market Cap (in $M): 22,721 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 21,778 TEV/EBIT 0 0

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Sea Limited (SE) has been previously written about on VIC by ZYOS and FLAUM.  Given the huge swings in the price over the past few years, I figured it is worth taking another look at it here.  SE has been both a pandemic success story and a widely criticized blowup afterwards.  But the underlying performance of the business has actually been pretty impressive over the past 2 years in my opinion, and I think is reminiscent of Amazon in the early 2000s where Amazon was forced to pivot hard towards profitability in order to sustain itself, and then subsequently reoriented towards growth after sustainability had been achieved.  In that same vein, SE has achieved profitability in 2023 and is now looking to re-accelerate growth going forward.

The company was founded by Forrest Li in 2009 originally as Garena and was subsequently rebranded in 2017 to Sea Ltd. Forrest Li is still the CEO and largest individual shareholder of Sea Ltd. 

In 2010 Tencent made a significant investment in Garena and gave them preferential access to their portfolio of games.  Tencent saw Garena as a strategic investment to expand outside of China.  This granting of access to Tencent’s games library cemented Garena’s position as the largest gaming distribution platform in South East Asia.  Garena’s leadership allowed them to introduce innovations specific to South East Asia which allowed them to better serve their customers, such as AirPay, where users could deposit cash at thousands of physical counters for use online.  (AirPay would eventually morph into what would become SeaMoney.)  These localizations made Garena more entrenched.

Because South East Asia was underdeveloped in terms of e-commerce, and because Forrest Li had the ambition to create a great internet company in South East Asia, Garena decided to create a new e-commerce division in 2015.  The new e-commerce division was called Shopee.  Shopee was modeled on other e-commerce companies like Alibaba and later Pinduoduo.  Shopee has become the largest e-commerce platform in South East Asia and is now SE’s most important business.

As Shopee’s business began to grow and take on more importance within the conglomerate, Garena eventually decided to change its name to Sea Ltd. In 2017. They retained the name Garena for the digital entertainment division.   

SeaMoney was built to address the problem that a huge amount of the population of South East Asia is unbanked or underbanked.  This makes transacting in the digital economy difficult for them to do.  In order to address this SE created SeaMoney which acts as a digital bank, and payment processor, and helps to facilitate online commerce in its other businesses.  Although SeaMoney was created largely to address problems in SE’s other two businesses, Sea Money has become a fast growing and profitable business in its own right.

Overview of SE’s Businesses

As I mentioned, SE has been covered twice before on VIC and is also well known as a “Fintwit” darling (or dog depending on who you ask).  Nevertheless I think it makes sense to overview what SE’s business looks like today.  SE is a conglomerate which consists of three main businesses.  These businesses are:

  1. Digital Entertainment (Garena)
  2. E-Commerce (Shopee)
  3. Digital Financial Services (SeaMoney)

All three businesses complement each other to some extent as profits from the gaming division have been used to subsidize investment in the other two businesses. In addition, they have marketed Shopee to Garena users to lower their customer acquisition costs.  But in particular, I think Shopee and SeaMoney are symbiotic businesses where growth in one can help drive growth in the other.  We can see from other e-commerce examples like MercadoLibre and Alibaba that robust and profitable fintech businesses can be built off of an ecommerce marketplace and the captive audience of the ecommerce userbase helps you to establish and grow the fintech offering.

Digital Entertainment (Garena)

Garena is the original SE business and acts as both a developer and a distributor of video games in South East Asia and beyond.  Their main title Free Fire was launched at the end of 2017 and has become a massive hit.  At its peak Free Fire had over 700 million quarterly active users. It can be seen as a Fortnite for mobile phones.  Free Fire is designed to work well on lower end smartphones that are typically used in Garena’s core markets of South East Asia and Latin America.  The fact that it’s engineered to run well on these phones is a differentiator from other battle royale games in those markets as it makes for a better gaming experience.  Garena has also done a good job of refreshing Free Fire with local content to keep it relevant to the players and keep them engaged, including getting a number of athletes and artists to sell digital products in the game.

In the past 2 years Garena has actually shrunk in terms of revenue and free cashflow as Free Fire matured and as pandemic lockdowns ended.  A good chunk of this was the banning of Free Fire in India which had been one of Garena’s largest markets prior to the banning.  The ban was likely related to SE’s Chinese connections and the fact that the Indian government did not want to have data from Indian users being stored on Chinese servers.  It was however recently announced that Free Fire would be relaunched in India with a special Indian version, one that would presumably address the concerns of the Indian government.  However, despite the fact this was announced in the fall, the launch has yet to happen as of January 2024.  Nevertheless, it is likely that the game will be relaunched at some point in 2024.

Garena is no longer the main driver of value for SE but it remains a good source of cash to be invested in other parts of the business.

E-commerce (Shopee)

Shopee was built as primarily a 3rd party digital marketplace along the same lines as Alibaba or Pinduoduo.  Shopee initially focused on a strategy with a few key planks:

  1. Mobile First – Given that most consumers in South East Asia (and Latin America) are more likely to be transacting on a mobile device rather than a desktop computer, it makes sense to focus on the mobile experience first.
  2. Focus initially on product categories which are more impulse purchases such as beauty and fashion, which also happen to be high margin.  These categories are more prone to browsing behaviour which encourages more engagement.
  3. Focusing on engagement and time-spent in-app as a key metric.  This leads to higher retention rates and higher repeat order rates.  This strategy views shopping as more entertainment then pure transactional.  Users are encouraged to log into the app to play games for discounts or for the social aspect.

Shopee’s strategy is to engage users and create more lock-in.  Once users’ habits have formed than subsidies, promotions, and other marketing spend can be withdrawn without a huge uptick in user churn.  Gradually the number of users and merchants reaches a critical mass that product categories expand and a network effect takes hold.  This playbook has been run by Shopee in a number of countries with consistent success.

In my opinion the focus on engagement is the key differentiation factor with well known North American e-commerce companies like Amazon.  Shopee’s strategy is more similar to Pinduoduo’s strategy in China which was originally more social focused and encouraged user engagement. 

This focus on engagement is what allows Shopee to take market share in countries like Brazil where they are at a disadvantage from a logistics point of view when competing with incumbents like MercadoLibre, and the strategy doesn’t necessarily require subsidies and discounts to be maintained if users find entertainment value in shopping in the app.  It’s hard to measure engagement but Shopee consistently ranks near the top of app downloads and time spent in-app.

In South East Asia, where Shopee has achieved a dominant market share, they are now starting to invest more heavily in logistics and other infrastructure to deepen their competitive advantage in their core home markets.

Digital Finance (Sea Money)

SeaMoney was originally created to solve the problem that many people in South East Asia are unbanked or under-banked.  They typically use cash for transacting and that poses a big problem when trying to purchase things online.  SeaMoney was created to facilitate payments for Garena and Shopee.

So originally SeaMoney was more of a payment processor and digital wallet service.  However subsequently SeaMoney has branched out into other financial products such as financing, buy now pay later (BNPL), insurance, and digital banking.  Because so much of SE’s core markets are under-banked or unbanked, there is a huge potential market of people who could be profitably addressed by a digital banking app like SeaMoney.  This is why there has been such rapid growth in this segment.  SeaMoney is also helped by the growth of Shopee and is able to complement that business with its financial offerings, such as BNPL.

Why the Opportunity Currently Exists

I think there are 4 major concerns that likely account for the low valuation of SE.  Here are the four concerns I’ve identified and my counterpoints to each.

  1. Competition

SE faces competition from larger companies like Alibaba (Lazada), TikTok (TikTok Shop), and more recently, Pinduoduo (Temu) and Coupang, in addition to local competitors like Tokopedia.  Many of these competitors, especially TikTok Shop and Lazada are funded by large Chinese megacaps with huge resources to fund investments in e-commerce in South East Asia.  In fact, Alibaba and TikTok have already invested billions of dollars into Lazada and TikTok Shop in South East Asia to try and gain market share.


This is nothing new however.  I note that in the previous VIC post on SE from 2018, FLAUM noted that Alibaba had recently injected money into Lazada leading to concern over a slowdown of GMV growth for Shopee.  Needless to say that concern in 2018 never materialized.  


Shopee was only founded in 2015 and was originally smaller than either Lazada or Tokopedia, which were founded in 2012 and 2009 respectively.  Shopee has proven since its launch only 9 years ago that it is more than capable of winning market share against these established competitors.  Shopee has a 46% market share in South East Asia which is actually a higher percentage than either Amazon or MercadoLibre in their respective markets.


In addition, I think the fear over competition underestimates how sticky Shopee is with its users.  They’ve consistently prioritized engagement with the Shopee App as a key metric and that generally leads to a higher repeat order rate.  Even in the past year where Shopee has been aggressively hiking fees and dropping promotional subsidies, Shopee’s GMV has remained pretty consistent (though it did stop growing rapidly).


It is very true that TikTok Shop is a formidable competitor and has made impressive market share gains in South East Asia over the past two years.  Their ability to divert users from the TikTok app is a huge advantage, especially in terms of live streaming commerce.  However this kind of e-commerce may have a ceiling as to size given that growth in TikTok’s ecommerce business in its home market of China seems to have slowed, and also given that TikTok has been raising fees on sellers over the past year.  If they were trying to steal as much market share as possible, it doesn’t seem like a good strategic move to raise fees at the same time. 


TikTok is also facing a regulatory backlash in a number of markets including Indonesia, Malaysia, and Vietnam.  This may hamper their growth and even their ability to operate going forward in some of these markets.  The biggest of these is Indonesia where TikTok has struck a deal to do Joint Venture with, and essentially assume control of Tokopedia.  It remains to be seen if this will be allowed by the Indonesian government but it seems likely to face regulatory scrutiny.  Either way I think Shopee should be able to effectively compete with TikTok going forward.


I think the market in South East Asia will continue to rationalize, despite the increased competition.  The fact that TikTok Shop is already raising fees for sellers suggests they are not interested in a subsidy war for market share.  Temu will have trouble pulling off their strategy of cheap Chinese imports in Indonesia given the regulatory change to ban imports of less than $100 value.  Tokopedia is in such dire straits that they were willing to basically sell themselves to TikTok, and Lazada has also been cutting staff and trying to become more profitable.  It doesn’t seem like anyone wants more losses fuelled by subsidies.


  1. Shopee’s Business Model is Structurally Unprofitable or Low Margin

Perhaps related to the fears of competition is the idea that Shopee has simply “rented” their customers by offering large subsidies and low fees.  As such the argument is that Shopee will be unable to retain these customers if they withdrew these subsidies or raised fees.  If that were the case then Shopee would be doomed to be a low margin commodity business forever.

I don’t think this argument holds much water given the success of similar e-commerce marketplaces around the world.  Amazon, MercadoLibre, Coupang, Alibaba, JD, and Pinduoduo (PDD) are all very profitable businesses now.  They all employed and are continuing to employ similar strategies as Shopee when it comes to spending on sales and marketing for growth.  In particular, you can draw parallels to the evolution of Pinduoduo’s business where PDD’s marketing spend was massive when growth was their priority, but as the business matured they were able to dial back the sales and marketing spend to become profitable.  Given that Tencent has backed both PDD and SE financially I don’t think those parallels are a complete coincidence.

Regardless, Shopee has proven over the past year that they can generate significant cash from e-commerce, and that’s before they’ve even fully exploited the fintech and advertising opportunities their e-commerce marketplace will afford them.

  1. Garena is a Shrinking Business and Lower Profits in Garena will Endanger SE’s ability to invest in their other businesses

Garena’s self developed game, Free Fire is by far the biggest driver of Garena’s profits over the past 5 years.  It has been a huge success and aided by the pandemic it attracted over 700 million active monthly users at its peak in 2021.  However this was probably an artificially inflated number given lockdowns at that time.  Active users jumped from around 610 million at the end of 2020 and then rose to over 729 million in Q3 of 2021.  They then fell back to below 600 million pretty quickly and currently sit at 491 million quarterly active users.  In hindsight this looks like the pandemic drove the Free Fire userbase to an unsustainable high level, HOWEVER a big part of the drop was the banning of Free Fire in India by the Indian Government.  Prior to the banning, India had been Free Fire’s biggest market in terms of users.


It’s still too early to say that Free Fire has bottomed but there are reasons to be encouraged.  From Q2 to Q3 the number of active users grew slightly suggesting stabilization perhaps.  In addition recent Sensor Tower data showed that Free Fire was the most downloaded game in the world.  Finally, Free Fire seems set to return to India, although the actual launch date has been delayed.


When you combine all of these factors, and possibly throw in some new game releases, it seems like the worst might be over in terms of Garena shrinking revenue and profits.  If Garena can stabilize it should provide a steady engine of cash to help drive Shopee growth as it currently provides about $1 billion of cash per year to SE.


Even if Free Fire hasn’t finished shrinking, it is very unlikely that Free Fire or Garena is going to zero anytime soon.  Massive hits like Free Fire tend to have long shelf lives as there are network effects with multiplayer games like this.  In addition Garena still has a publishing relationship with Tencent which should ensure a steady stream of game releases for Garena to distribute in South East Asia.


And because Shopee and SeaMoney are no longer burning through large amounts of cash, the need for Garena profits to subsidize the other two businesses has become less pressing.


  1. Management Was Too Aggressive in Expanding into new Geographies in Europe, India and Latin America and Has Made Too Many Mistakes

This to me is more of a subjective criticism, and I think is open to interpretation.  In 2021 there is no doubt that Shopee expanded aggressively into Latin America, India, and Europe, and into markets far beyond their traditional home markets.  Aside from Brazil these investments all had to be pulled back to conserve cash.  So on the surface level these were mistakes that cost SE money.

It’s also true that they could have used those funds to try and invest in logistics infrastructure in South East Asia and fortified their existing market share there.  I think that’s a valid criticism but perhaps overstated.

I think it comes down to a philosophical choice of how you want management to behave.  When it comes to “spawner” type companies like SE, I want management to run experiments and to spend money to do so.  By experimenting and possibly creating whole new businesses, they can create huge value for shareholders.  SE has already proven with Shopee and SeaMoney that they can do this.  Other e-commerce marketplaces have also been good spawners. 

Amazon has created an advertising business, a logistics business, a loyalty membership business, as well as a cloud business.  Would it have been a mistake for Amazon to invest money building AWS?  I have no doubt there were people criticizing that investment prior to 2015, just like they are criticizing Shopee now.  The results are what matters when it comes to critics.

I on the other hand am less interested in the results but more in the process.  If the process is sound, then results should follow.  If we assess the process of how Shopee expanded in 2021, I actually don’t think there was any glaring errors.  Most of the expansions to Europe did not fare well and didn’t last that long.  I think these were worthwhile experiments to run and were cut off when they didn’t produce results.  I don’t think a meaningful amount of money was spent on these experiments, especially when compared with SE’s market cap at that time.  This is exactly how I want management to behave.  Let them try things and when they don’t work, kill the experiment.  This kind of process is a huge part of why Amazon is the dominant company it is today, and if we’re lucky SE can follow a similar path.

In Latin America and India, I think Shopee was actually gaining good traction in 2021.  It was only the rise in interest rates and the cutoff of cheap capital that forced Shopee to retreat on these expansions (save for Brazil which remains a core Shopee market). 

Was it aggressive to expand as fast as they did?  Sure, but arguably it was an understandable decision to make.  Money WAS cheap back in 2021 and those markets were huge sources of potential value.  If Shopee could have run the same playbook in India that it’s currently running in Brazil, with similar results, what would that have been worth to SE shareholders?  In addition with the popularity of Free Fire in a lot of these countries, I believe SE had a window where they could piggyback on Free Fire’s popularity to help them grow their customer base.

Could that money have been better spent on logistics in South East Asia?  Possibly but it doesn’t look like it was an either/or kind of situation.  Shopee was making logistics investments all along and they are continuing to invest more heavily in logistics now.  Since they are delivering more packages internally in South East Asia then anyone else, it’s hard to argue they’ve given up their leadership position in logistics.  To the contrary for reasons, I’ll explain below, I think they are the clear frontrunner to build the biggest logistics business among e-commerce marketplaces in South East Asia.


What the Market is Missing

I believe the market is missing several key components of SE’s future and as a result is overly fearful of competition and is too pessimistic about SE’s future growth.

Some areas where I think the market is clearly missing:

  1. SE is in a far better competitive position than the market gives them credit for – In spite of the hard pivot in 2023 to profitability, GMV has still grown by 5.1% YoY.  While TikTok Shop appears to be taking market share, it doesn’t appear that much of it is coming from Shopee, if any at all.  In addition, Shopee’s traditional competitors, Lazada and Tokopedia appear to be struggling.  Tokopedia has basically capitulated in it’s attempt to essentially sell itself to TikTok Shop for $1.5 Billion.  It remains to be seen if Indonesian regulators will allow the deal to go through.


TikTok Shop also happens to be hiking fees and reducing subsidies in its US business which mirror earlier moves in SE Asia where they raised fees and lowered subsidies.  If TikTok was really intent on growing their e-commerce business by ruthlessly subsidizing merchants, then why would they be raising fees?


Meanwhile Lazada recently announced that they’d be letting go of 30% of their staff (, not exactly the actions of a company who plan to outspend their way to higher market share.  I also wonder if the management turnover at Alibaba has left Lazada with even less strategic direction then they’ve had historically (which is saying something given Lazada’s own turnover in top management).


It’s also worth noting that TikTok Shop, Lazada, and Tokopedia have never recorded a profit in South East Asia.  The only e-commerce company who has ever been profitable is Shopee.  Recent moves suggest that Shopee’s competitors are trying to get profitable (or in the case of Tokopedia, sell) and that should lead to further rationalization of the market.


  1. Untapped optionality within Shopee – We have seen from other e-commerce companies globally (Amazon, MercadoLibre, Alibaba) that they are often able to spawn adjacent businesses such as advertising and fintech.  SeaMoney is still growing very rapidly at 36.5% YoY revenue growth in Q3 2023 and is already profitable on an Adjusted EBITDA Basis.  In addition, the core marketplace revenue of Shopee, which includes commissions on transactions as well as advertising fees grew 31.7% YoY in the most recent quarter.  As GMV growth is starting to re-accelerate, advertising (which is very high margin) should start to accelerate as well.  It seems unlikely to me that an e-commerce marketplace with the market share that Shopee has in the fastest growing e-commerce markets in the world will be unable to grow advertising revenues at a very fast pace for years to come.
  2. Shopee’s Advantages in Logistics – Shopee’s scale and cash rich balance sheet should give it an advantage in driving down logistics costs compared to its competitors and especially compared to companies that solely utilize third party logistics (3PL) like TikTok Shop or Temu.  That’s because Shopee’s GMV is double the size of any other companies in South East Asia and so Shopee can amortize investments in logistics over a much larger userbase.  Shopee should be able to invest more into logistics infrastructure than anyone else, hopefully driving down the cost of deliveries.


In addition SE has $7.9 billion of cash and other investments ($4.6 billion net of Convertible Bonds issued) which they could use to invest in e-commerce infrastructure like logistics, and that is actually increasing as Garena continues to generate cash and has, at least for the last quarter, been able to cover the increased investments in Shopee.


There is a dynamic in logistics in South East Asia which I don’t think is well understood.  Most of the players have relied upon 3PL providers to fulfill their orders.  Even Shopee continues to rely on 3PL companies like J&T for a majority of their orders.  This has worked well as the upfront logistics investments were borne by 3PL companies allowing the e-commerce companies to remain capital light.  As Shopee’s scale increased it was able to negotiate better logistics rates which lowered their costs.  These savings could be passed on to the end customer making Shopee more attractive as a marketplace.


Now however Shopee has the cashflow to start investing more into their own internal logistics infrastructure in order to potentially lower the costs of fulfillment even more.  This has resulted in orders being diverted away from 3PL providers.  Given that Shopee was the 3PLs main customer in South East Asia the loss of Shopee’s business will strain the margin profiles of these 3PLs as they have a large amount of fixed costs.  This could conceivably lead the 3PLs to raise prices to cover their costs.


Since TikTok relies solely on 3PL to fulfill their orders, Shopee could conceivably be in a very enviable position where they are lowering their logistics costs while at the same time 3PL are raising their prices on fulfillment for TikTok.  It will take time for this dynamic to play out but it’s no secret that investing in logistics can create a formidable moat for e-commerce as shown by Amazon, MercadoLibre, Coupang.  In addition, given that the average order size is relatively low ($10 US), a small change in logistics costs can make a big difference.  Shopee is already fulfilling more orders internally than anyone else in South East Asia and given their scale and capacity to invest, that lead will likely increase.


  1. Garena’s Revenue Slide is Likely at an End – Between Q4 2022 and Q1 2023 Garena’s revenue shrank from $948.9 Million to $539.7 million, a drop of 43%.  In the most recent quarter of Q3 2023 Garena’s revenue was back up to $592.2 million, an increase of about 10% from Q1.  It might be too early to say that Garena has fully bottomed, but it is also true that Garena is about to lap the 43% drop at the beginning of last year and that is going to make the comps look much more favourable going forward, both for Garena and for the conglomerate as a whole.  If you tack on the fact that Free Fire downloads seemed to have picked up in recent months, and that is even without an official relaunch into India, I think it’s likely that Garena will be more stable going forward and might even show some growth in 2024.  In hindsight its clear to see that the pandemic supercharged Free Fire’s popularity and revenue to unsustainably high levels and now I think we are just reverting to a more normalized trajectory for a game that, while wildly successful, is still 6 years old.
  2. General untapped optionality unrelated to e-commerce – SE has spawned two very successful businesses already from its original gaming business.  They also continue to have various growth projects that could spawn new businesses in the future, an example of which would be Sea Computing, a cloud offering.  It is impossible to predict what will be created or what those future businesses might be worth, but it also seems unlikely (to me at least) that they will be worth 0.  So while I wouldn’t assign any value to future businesses in a valuation of SE, I think it is nevertheless likely that value will be created.


Given the complexity of SE’s conglomerate business you can get into a pretty detailed analysis of the various pieces and what they are worth.  However, I think SE is cheap enough that we don’t have to go into any great detail here.

I estimate SE will likely do around $13.2 Billion in revenue in 2023.  If we assumed that in a steady state-no growth type of environment SE could mature at a 15% FCF margin across the entire conglomerate, that amounts to $1.98 Billion in potential FCF. 

Obviously there is much room for debate over what SE’s margins will look like but given that they had a 43% Gross Margin across the entire conglomerate in their most recent quarter, and given that e-commerce marketplace companies globally have achieved profit margins in excess of 15% I don’t think 15% FCF margins are unrealistic.  (Alibaba’s net margin in the very competitive Chinese e-commerce market was 15% in the most recent quarter and was 28% in 2021. Mercado Libre generated an EBIT margin of 18.6% in their most recent quarter (which is expanding rapidly).  Both those numbers likely understate the potential profitability of those two companies as they are both investing in growth).  In addition both Alibaba and MercadoLibre have extensive logistics operations so the argument that logistics investments will prevent SE from achieving decently profitable margins doesn’t really ring true.  Specifically I believe that logistics investments will be more than offset by a higher percentage of revenue coming from fintech and advertising in the future.

If you then grow that FCF on a per share basis at a 15% clip for 5 years and assign a terminal multiple of 18 times in 2029 you would generate an IRR of 29% from today’s price, and that’s assuming no interim FCF over the next 5 years.  It also ignores the billions of net cash currently on SE’s balance sheet.

Even if you assume much more pedestrian growth of 5% a year and a terminal multiple of 10, you would still be in the green with about a 4% IRR over the next 5 years, again ignoring any interim cashflows or net cash on the balance sheet.  That growth rate and terminal multiple would be extremely pessimistic given their current competitive position and I think it’s unlikely the business performs that poorly.  It seems like to me that the downside risk over the long term is pretty low from here. 

We can all concoct scenarios where TikTok Shop and an Alibaba funded Lazada grind Shopee down over the next 5 years but there is little evidence to date that suggests we should be more pessimistic then these two scenarios.  Management disclosed that GMV was growing at 10% QoQ in Q3 and that those growth trends were continuing into Q4 so it’s very possible that growth will be much faster than 15% annually.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


I view the catalysts for SE as follows:

  1. Continued acceleration of Shopee GMV Growth
  2. Lapping of unfavourable Garena comps in H1 2024
  3. Relaunching of Free Fire in India
  4. Continued growth and margin improvement of Sea Money
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