Sea Limited (NYSE: SE) sparked the dreams of many millionaires in its first four years post-IPO in October 2017. Initially offered at $15, the Singaporean e-commerce and gaming giant saw its shares reach an all-time high of nearly $367 by Oct. 19, 2021. This meteoric rise transformed a $50,000 investment at its IPO to a dazzling $1.2 million.
However, Sea Limited’s stock now hovers around $58, diminishing that investment to approximately $193,000. Despite this retreat, the stock remains nearly four times more valuable than seven years ago. Yet, the company’s allure faded as sales growth tapered, mounting losses accrued, and escalating interest rates deflated its lofty valuations.
Image source: Getty Images.
The ensuing downturn scaled back Sea’s enterprise value to $29 billion, resting at just two times its estimated sales and 21 times its projected 2024 adjusted EBITDA. Could this diminished valuation function as a rock-bottom support level for its stock price, potentially opening the gates to future millionaire-making growth?
Challenging the Waves of Slowed Growth
Sea Limited’s chief revenue stream originates from Shopee, the premier e-commerce hub in Southeast Asia and Taiwan. Following closely is Garena, a gaming powerhouse mainly fueled by Free Fire. Meanwhile, its fintech arm, comprising the SeaMoney digital payment platform and other financial amenities, contributes a smaller share of overall revenue.
Sea bolsters the growth of its lower-margin e-commerce and fintech units with Garena’s higher-margin earnings. Yet, this strategy is precarious, pinned on Garena’s reliance on a solitary blockbuster game. Consequently, as Shopee’s growth decelerated, so did Garena’s bookings over the past couple of years.
Metric | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|
Shopee revenue growth | 160% | 136% | 42% | 23% |
Garena bookings growth | 80% | 44% | (39%) | (36%) |
Total revenue growth | 101% | 128% | 25% | 5% |
Data source: Sea Limited.
Shopee’s ascendancy waned as its pandemic-driven tailwinds ebbed, facing stiff rivalry from Alibaba‘s Lazada and ByteDance’s TikTok Shop. Streamlining expenses led Shopee to retreat from several international markets to curtail costs, while also diminishing the initial customer-attracting subsidies.
Instead of reinforcing Shopee’s regional logistics capabilities during its pandemic sales boom, Sea veered to broaden Shopee into foreign markets like India, South America, and Europe. Regrettably, most of these endeavors floundered as Shopee struggled to captivate new shoppers post-pandemic.
Furthermore, Free Fire faced dwindling bookings upon the pandemic’s decline as players migrated to other mobile games. Additionally, the game’s ban in India due to privacy concerns in early 2022 and the uncertain relaunch status exacerbated Garena’s challenges, reducing its active user base by year-end 2023.
As Sea’s growth lost steam, cost-cutting measures were implemented, with the adjusted EBITDA margin escalating from 2% in 2020 to 9% in 2023, resulting in Sea’s inaugural annual GAAP profit in 2023.
Unveiling the Future Growth Trajectory
Sea’s newfound profitability is a beacon of hope, yet its era of hypergrowth might be behind it. Analysts project a modest 13% compound annual revenue growth rate (CAGR) from 2023 to 2025. On a brighter note, they predict a 38% CAGR in adjusted EBITDA and a staggering 138% CAGR in GAAP net income for the same period.
Though these projections warrant a prudent eye, they hint at Shopee stabilizing its growth, fortifying logistical infrastructures, and capitalizing on Indonesia’s recent ban on TikTok Shop. The resurgence of Garena through Free Fire’s Indian re-entry, franchise enhancements, game additions, combined with fintech expansion, may amplify growth.
Potential for Wealth Creation
If Sea upholds analyst forecasts and maintains a 25% adjusted EBITDA CAGR from 2025 to 2035, it could amass $9 billion in adjusted EBITDA in 2035. Valued at 21 times its forward adjusted EBITDA, Sea’s enterprise worth could reach $189 billion by the start of 2035.
This potential 550% surge could translate a $50,000 investment into over $325,000. While impressive, investors should not anticipate Sea replicating its historical growth or single-handedly generating significant millionaire-making returns. Nevertheless, woven into a diversified stock portfolio, Sea Limited might pave the path to millionaire status.
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Leo Sun has positions in Sea Limited. The Motley Fool has positions in and recommends Sea Limited. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.