Why Is Everyone Talking About Sea Limited Stock?

Sea Limited (NYSE: SE) has been one of the most interesting tech companies to watch for the last few years.

At one point, it was a growth darling that most investors loved, sending its stock to a high of $367 during the COVID-19 pandemic lockdown in 2021. Yet, a series of missteps and uncontrolled losses amid its global ambitions sent the stock down by more than 90% from its peak in the next two years.

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However, as Sea went through its transformation process, it positioned itself to grow more sustainably. This new strategy has gained investor approval, which explains the solid 200% rise in stock price over the last 12 months.

Image source: Getty Images.

A leading tech company in Southeast Asia

Founded as a gaming company, Sea has followed in the footsteps of leading tech Chinese companies like Alibaba and Tencent by diversifying its business into new areas. It now runs a three-pronged business model across e-commerce, gaming, and fintech.

Its e-commerce business, Shopee, is a leading marketplace in Southeast Asia, Taiwan, and Brazil, occupying one of the top three positions in almost all of its markets. This business generates revenue mainly through marketplace commissions, advertising, and transaction fees (mainly from logistics and fulfillment).

Garena, its gaming arm, develops and publishes mobile games, notably Free Fire. It also partners with leading gaming companies like Tencent to publish the latter's games in selected geographies. Sea Money, the fintech arm, offers digital financial services like mobile wallets, digital banking, lending, and buy-now-pay-later services to users in Southeast Asia.

While each business operates independently, Sea leverages each business's strengths to complement the rest. For instance, the tech company reinvested Garena's profits in the early days to acquire new users in the e-commerce segment. Similarly, Sea Money leverages Shopee's huge e-commerce ecosystem to acquire new users and launch new services.

A massive comeback in the last few years

Sea has been an aggressive growth company for most of its existence, scaling its businesses across Southeast Asia. Notably, Shopee went from nothing in 2015 to become the largest e-commerce platform in Southeast Asia thanks to its growth-at-all-costs strategy. Shopee's revenue surged by 160% in 2020, followed by another 136% in 2021.

This aggressive strategy was necessary for Shopee to gain economies of scale but came at a considerable cost to the company. It had to rely on Garena's profits and external funding to keep its growth machine spinning, as it was heavily subsidizing users by offering free deliveries. For perspective, Shopee's adjusted earnings before interest, tax, depreciation and amortization (EBITDA) was negative $2.6 billion in 2021. However, such an expansion strategy hit a roadblock in 2022 as Garena's profits fell and external funding dried up.

Shopee had to rationalize its subsidies, cut costs, and scale back its expansion ambitions by exiting loss-making markets like India and Europe. Fortunately, these efforts succeeded in helping Shopee deliver a positive adjusted EBITDA of $196 million in the fourth quarter of 2022. By delivering a positive EBITDA, Shopee demonstrated the viability of its business model. More importantly, it gave Sea the confidence to reinvest in growth again but at a more manageable rate in the following quarters.

So far, Sea's new strategy is working, as revenue grew by 31% to $4.3 billion, and net profit came in at a positive of $153 million in 2024's third quarter. It also ended Q3 with $9.9 billion in cash, cash equivalents, short-term investments, and other treasury investments.

A sea of opportunity ahead

With Sea's finances back in shape, the tech giant is well-positioned to continue growing for the next few years. On one hand, the e-commerce arm can continue to grow as it leverages the ongoing increase in online penetration in Southeast Asia and Brazil. Shopee's growing scale should give it ample opportunities to increase the marketplace's take rate via fees, advertising income, and other complementary services like logistics services.

Similarly, Sea Money is rapidly expanding its financial services by leveraging Shopee's extensive user base. It offers digital wallets, loans, insurance, and other products to satisfy its users. In certain countries like Singapore and Indonesia, Sea Money has secured a banking license to provide digital banking services to its customers.

While Garena's prospects aren't as clear-cut as the other two segments, it has recently started growing again. Bookings grew 24% in 2024's third quarter, thanks to Free Fire's strong performance. If Garena can sustain this trend, it will provide Sea with a third avenue to grow in the coming years.

In short, there are plenty of opportunities for Sea to sustain its growth machine in the future!

What it means for investors

Sea has come a long way from its meteoric rise, sharp decline, and subsequent recovery. It has learned valuable lessons from its missteps and is now prioritizing sustainable growth over reckless expansion. If it continues effectively executing its strategy, it could once again become one of the top-performing tech stocks in the coming years.

All said, it pays to keep an eye on this company.

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Lawrence Nga has positions in Alibaba Group and Sea Limited. The Motley Fool has positions in and recommends Sea Limited and Tencent. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.