Sea Limited (NYSE: SE) minted a lot of millionaires in the first four years after its initial public offering (IPO) in October 2017. The Singapore-based e-commerce and gaming company went public at $15, and its shares soared to an all-time high of nearly $367 on Oct. 19, 2021. A $50,000 investment in its IPO would have blossomed into $1.2 million.
However, Sea’s stock now trades at about $58 — so that investment would have shriveled to roughly $193,000. That’s still a near-four bagger gain in less than seven years, but the company lost its luster as its sales growth slowed down, it racked up steep losses, and rising interest rates popped its bubbly valuations.
Image source: Getty Images.
That decline reduced Sea’s enterprise value to $29 billion, which is just 2 times its projected sales and 21 times its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2024. Could that low valuation set a floor under its stock price and pave the way toward more millionaire-making gains in the future?
Deceleration in Growth: A Swell in the Journey
Sea generates most of its revenue from Shopee, the top e-commerce marketplace in Southeast Asia and Taiwan. Its second-largest business is Garena, a video game publisher that generates most of its bookings from Free Fire — a mobile battle royale game that became immensely popular during the pandemic. It generates a lower percentage of its revenue from its fintech business, which houses its integrated SeaMoney digital payments platform and other financial services.
Sea subsidizes the growth of its lower-margin e-commerce and fintech businesses with Garena’s higher-margin revenue. But that strategy is unbalanced because Garena only has one hit game. Over the past two years, Garena’s bookings plummeted as Shopee’s revenue growth slowed down.
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 growth cooled off as its pandemic-era tailwinds dissipated, it faced fierce competition from Alibaba’s Lazada and ByteDance’s TikTok Shop in Southeast Asia, and it retreated from several overseas markets to cut costs. It also reined in its loss-leading subsidies that initially attracted a lot of shoppers.
Instead of capitalizing on Shopee’s big growth spurt during the pandemic to strengthen its first-party logistics capabilities in Southeast Asia and Taiwan, Sea tried to expand Shopee into overseas markets like India, South America, and Europe. But most of those efforts flopped as Shopee struggled to gain new shoppers in a post-pandemic market.
Meanwhile, Free Fire’s bookings plummeted as the pandemic passed and its players shifted toward other mobile games. The game was also banned in India, one of its fastest-growing markets, in early 2022 due to privacy and data security concerns — and its planned relaunch of the game for the country is still in limbo. That’s why Garena ended 2023 with just 528.7 million quarterly active users, compared to 610.6 million at the end of 2020.
As Sea’s growth cooled off, it cut costs and reined in its loss-leading strategies. Its adjusted EBITDA margin rose from 2% in 2020 to 9% in 2023, and it posted its first annual profit on a generally accepted accounting principles (GAAP) basis in 2023.
The Horizon of Growth: Moving Forward
Sea’s newfound profitability is encouraging, but its hypergrowth days could be over. From 2023 to 2025, analysts expect its revenue to only grow at a compound annual growth rate (CAGR) of 13%. On the bright side, they expect its adjusted EBITDA to rise at a CAGR of 38% as its GAAP net income increases at a CAGR of 138%.
We should take those estimates with a grain of salt, but they suggest that Shopee’s growth will stabilize as it right-sizes its business, strengthens its first-party logistics capabilities, and benefits from Indonesia’s recent ban on TikTok Shop. They also assume that Garena will grow again as it relaunches Free Fire in India, refreshes the Free Fire franchise with new updates, and broadens its portfolio with new games. The expansion of its fintech ecosystem should complement that growth.
The Path Ahead: Navigating Investor Expectations
If Sea matches analysts’ expectations and continues growing its adjusted EBITDA at a CAGR of 25% from 2025 to 2035, it could generate $9 billion in adjusted EBITDA by the final year. If it’s still trading at 21 times its forward adjusted EBITDA, its enterprise value could reach $189 billion by the beginning of 2035.
That 550% gain could turn a $50,000 investment into more than $325,000. That’s an impressive return, but investors shouldn’t expect Sea to replicate its growth from the past seven years or generate big millionaire-making gains on its own. That said, it might still help you become a millionaire as part of a more broadly diversified portfolio of stocks.
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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.
