Summary

• Sea Limited reported strong Q3/24 results, with revenue up 30.8% YoY and a switch to operating income from a loss.

• E-commerce, Digital Financial Services, and Digital Entertainment segments show significant growth, particularly in revenue and user engagement.

• Intrinsic value calculations suggest Sea Limited can sustain high growth rates, justifying its current valuation and "Buy" rating.

by Daniel Schönberger

While my investment focus is clearly on the United States (as for most other analysts writing here), I also try to look across the big pond, which is not so difficult for me as I live in Germany. But aside from European companies, I also try to include some Asian companies, and one company from Singapore piqued my interest about three years ago: Sea Limited.

Now it has been more than a year since I last covered the company and its stock. Back then I rated the stock as a clear “Buy” but also underscored the speculative nature. I did not invest in Sea Limited myself (which might have been a mistake) but in the last 15 months, the stock increased 230% in value (and clearly outperformed the S&P 500). In my last article, I wrote the following conclusion:

I think it comes down to a simple decision every investor has to make for him- or herself: Are we expecting Sea Limited to be able to fend off its competitors and all the companies trying to enter the market. And are we expecting Sea Limited to profit (at least a little bit) from the growing e-Commerce market in Southeast Asia? If that is the case, the stock is a clear “Buy” at this point.

But, Sea Limited is a really speculative “Buy” and I get it if people remain sceptic. It is speculative as the “small” company Sea Limited (about $21 billion market cap) has to compete with e-Commerce giants like Alibaba and Amazon as well as shopping on Platforms like TikTok and Facebook. On the other hand, this could be an “Amazon 2003” moment. Or it could be a company we won’t remember in 10 years from now. Or, with a market capitalization of $21.8 billion, it could be an acquisition target for companies like Alibaba, ByteDance or Meta Platforms. This is what makes it a speculative “Buy” – but it is a “Buy” in my opinion.

Now let’s look at the stock once again and answer the question if Sea Limited is still a “Buy” or if the stock price appreciation demands a different view and maybe even a different rating.

Data by YCharts

And while the stock price increased a lot in value in the last few quarters, we can point out that Sea Limited is still trading 65% below its previous all-time high and was declining as much as 90% in the meantime. But we should not pay so much attention to the highs and lows of the stock, but rather look at the fundamental numbers.

Quarterly Results

On November 12, 2024, Sea Limited reported third quarter results for fiscal 2024, and it is safe to say that the company reported great results once again. Revenue increased from $3,310 million in Q3/23 to $4,328 million in Q3/24, resulting in 30.8% year-over-year growth. Instead of an operating loss of $127.7 million in the same quarter last year, the company reported an operating income of $202.4 million in this quarter. Finally, the bottom line also switched from a diluted loss per share of $0.26 in Q3/23 to earnings per share of $0.24 in Q3/24.

Sea Limited Q3/24 Presentation

Segment Breakdown

Sea Limited is reporting in three segments – E-commerce, Digital Financial Services and Digital Entertainment. Let’s look at the three different segments, and we start with E-commerce, the segment generating the most revenue. In Q3/24, E-commerce generated $3,183.6 million in revenue and compared to $2,232.0 million in revenue in the same quarter last year, this results in 42.6% year-over-year growth for the top line. However, the segment once again generated an operating loss of $36.8 million and, compared to an operating loss of $428.2 million in the same quarter last year, this is a major improvement. However, when looking at adjusted EBITDA, the segment was profitable in both Asia and Brazil. Especially in Brazil, the average monthly active buyers grew close to 40% year-over-year in the third quarter. Half of SPX Express orders in Asia were now delivered within 2 days of order placement and the costs per order also continued to improve quarter-on-quarter in Asia as well as Brazil.

Sea Limited Q3/24 Presentation

Additionally, gross merchandise volume increased 24.9% year-over-year from $20.1 billion in Q3/23 to $25.1 billion in Q3/24. Gross orders were 2.8 billion for the quarter and increased 24.2% year-over-year.

Sea Limited Q3/24 Presentation

The second segment is Digital Financial Services, which generated a revenue of $615.7 million. Compared to $446.2 million in the same quarter last year, this results in 38.0% year-over-year growth. The segment also generated an operating income of $173.9 million and, compared to an operating income of $150.5 million in the same quarter last year, this results in 15.5% year-over-year growth. As of September 30, 2024, consumer and SME loans principal outstanding increased 73.2% YoY to $4.6 billion. SeaMoney added more than 4 million first time borrowers, and the number of active users reached 24 million at the end of the quarter. And the average loans outstanding per user is less than $200 with a tenure period of only a few months. Additionally, the loans are spread over a very large user base across different markets, which can be seen as factors to reduce credit default risk.

The ratio of non-performing loans of the last 90 days improved from 1.4% in the same quarter last year to 1.2% this quarter. During the last earnings call, management also explained how data from Shopee allows the company to better underwrite risk:

Shopee's large user base in our market makes it highly efficient for us to acquire and serve credit users. Proprietary data from Shopee also allows us to better underwrite risk. In addition, we have diversified funding sources such as innovative asset-backed lending products and our digital banks in local markets that give us that give us access to retail deposits. All of this has led us to scale up our credit business very quickly and profitably.

The third and final segment is Digital Entertainment, which generated $497.8 million in revenue and compared to $592.2 million in the same quarter last year, this is a decline of 15.9% YoY. And while the segment was struggling by looking at the top line, bookings increased from $447.9 million in Q3/23 to $556.5 million in Q3/24 – resulting in 24.2% YoY growth. And operating income also declined from $345.8 million in the same quarter last year to $262.4 million in this quarter (resulting in a 24.1% YoY decline). However, adjusted EBITDA increased 34.4% YoY to $314.4 million and adjusted EBITDA as percentage of bookings increased from 52.2% in the same quarter last year to 56.5% this quarter.

Sea Limited Q3/24 Presentation

We can look at a few more metrics, the number of quarterly active users increased 15.5% YoY to 628.5 million and the number of quarterly paying users increased 23.9% YoY to 50.2 million. Hence, the quarterly paying user ratio increased from 7.5% in the same quarter last year to 8.0% this quarter.

Sea Limited Q3/24 Infographic

And during the earnings call, management also pointed out it is launching additional games:

Beyond Free Fire, Garena launched Need for Speed Mobile in Taiwan, Hong Kong and Macau at the end of October. Since its launch, it has ranked as the #1 most downloaded racing game in all 3 markets according to Sensor Tower. We are also strengthening our partnership with Tencent to bring Delta Force, a first-person tactical shooting game, to PC and mobile users in several markets across Southeast Asia, MENA and Latin America.

Growth

When looking at the e-commerce market, which is extremely important for Sea Limited as it is generating the biggest part of revenue (although not profitable right now), we see different studies expecting rather high growth rates. When looking at the entire Asia-Pacific region, eMarketer is expecting retail e-commerce sales to grow in the mid-to-high single digits in the years to come.

eMarketer

Other studies focusing especially on Southeast Asia are expecting even higher growth rates. While Mordor Intelligence is expecting only 11% growth for the years till fiscal 2030, other studies are expecting growth rates close to 20% annually until 2032. And whatever the growth rates will be in the end, expecting double-digit growth rates for Sea Limited’s e-commerce business is not unreasonable.

Epyllion - Matthew Ball

While e-commerce might be the most important segment when talking about revenue, digital entertainment is the most important segment considering profitability and operating income. And the gaming market struggled in the last few years – not only for Sea Limited. Since 2021, we can describe the worldwide consumer spending on video game content as stagnant, but in inflation adjusted terms, we even see a decline of 13% between 2021 and 2024.

Allcorrect Games

But for the next few years, the video game market in Southeast Asia is expected to grow with a solid pace – between 2024 and 2027 a CAGR of 7.8% is expected.

And finally, we can look at the digital financial services. Here it seems rather difficult to make precise predictions for Sea Limited and its SeaMoney business. But overall, different studies (see here and here) and numbers from Statista expect digital payments in Southeast Asia to increase with a CAGR of 20% in the next few years.

When combining all the different segments, we have reasons to be optimistic for double-digit growth at least in the teens in the next few years. Growth expectations for the different segments above are for the entire market, but Sea Limited might grow its top line even with a higher pace by gaining market shares. And bottom growth could be higher once again as improving margins might also contribute in the years to come (the e-commerce segment, for example, is still not profitable).

Overall, analysts are very optimistic and at least for the next two years expected growth rates are very high. In fiscal 2025, EPS growth is estimated to be 82% and in fiscal 2026 the bottom line is expected to grow 29%. Additionally, analysts are getting more and more optimistic and raise estimates for revenue in the last few quarters, which is a good sign.

Intrinsic Value Calculation

So far, we have established that Sea Limited is reporting high growth rates and estimates should also make us optimistic for similar high growth rates in the next few years. But in the end, we need to calculate an intrinsic value to determine if the stock is a good investment.

We can start by looking at the simple valuation multiples – the P/E ratio and P/FCF ratio – but the information might be limited. Especially, a P/E ratio around 850 is not really a number we can work with and probably not an accurate description of the business.

Data by YCharts

A better metric might be the price-free-cash-flow ratio. At the time of writing, Sea Limited is trading for 30.4 times free cash flow, which is certainly not cheap – but it might be justified for a business growing in the double digits.

But as always, we use a discount cash flow calculation to determine an intrinsic value. As always, we calculate with a discount rate of 10% as this is the annual return on investment we like to achieve at least. Additionally, we calculate with the free cash flow of the last four quarters, which was $2,535 million and seems like a reasonable basis for our calculation.

Data by YCharts

In my last article, I wrote about the difficult to get the accurate number of shares outstanding. Over the last nine months, the average reported number of shares outstanding was 573.3 million, closely matching the number derived from the share price and market capitalization. Therefore, we can assume these numbers to be correct, but we use the diluted number of shares outstanding, which was 602.7 million.

When calculating with these assumptions and in order to be fairly valued, Sea Limited has to grow its free cash flow only 9% annually for the next ten years followed by 6% growth till perpetuity in ten years from now. We could argue that 6% terminal growth rate is too optimistic and not a number we should use in a calculation. Instead, if we calculate only 4% growth till perpetuity starting in 10 years from now, Sea Limited has to grow its free cash flow about 13% annually for the next ten years – and these are also reasonable assumptions.

Conclusion

In my opinion, we can assume that Sea Limited is able to grow at a higher pace than the growth rates used in our calculation above, and therefore I would still see the stock as a “Buy”. We could probably argue it is less speculative than in my last article, but back then it was more undervalued.

On March 4, 2025, Sea Limited will report full-year results for fiscal 2024, which may provide more insights into whether the business can sustain its high growth rates.