Summary

• Sea Limited shows strong revenue growth, margin expansion, and success across all regions, especially in E-Commerce, driving a bullish long-term outlook.

• Q3 revenue grew 31% yoy to $4.3 billion, with E-Commerce revenue up 43% yoy, highlighting robust consumer spending and marketplace traction.

• Digital Entertainment and Digital Financial Services segments also posted impressive growth, with improved paying customer ratios and strong loan performance, respectively.

• Despite the stock's strong YTD performance, potential pullbacks could offer attractive entry points, with continued execution and growth prospects likely to drive the stock higher.

Abstract Aerial Art

Sea Limited (NYSE:SE) continues to report encouraging results across all three business units. The one-year stock chart is very impressive. However, the company remains well below its 2021 highs. With a more stable macro and strong operational performance, investors could continue to see upside to the stock.

With the company reporting Q3 results, SE has demonstrated strong revenue growth of 31%, ongoing margin expansion, and continued success across all regions, including geographies outside of Southeast Asia. Consumer spending trends appear to be holding up well, and despite some of the operational challenges seen over the past 18-24 months, management has put this company back on track to succeed as we head into 2025.

Data by YCharts

The stock is up over 200% YTD, though remains down nearly 70% from all-time highs. While it can be argued that SE, like many E-Commerce and software companies in 2021, was way overvalued and not deserving of the $350+ stock price at the time.

However, the prospects of a stable macro environment, particularly in more volatile SE Asia and South American economies, ongoing traction within each business units, and an attractive valuation leave me more bullish on the stock.

Given the strong run in the stock, investors may be more careful when building a position in the name. Potential pullbacks in SE could provide for more attractive entry points, though I believe the current execution and prospects of future growth should drive the stock much higher over the next 12-24 months.

Financial Review and Guidance

During Q3, the company reported revenue growth of 31% yoy to $4.3 billion, which was above consensus expectations for $4.1 billion, a nice ~5% beat. Adjusted EBITDA also saw a significant improvement, coming in at $521.3 million, compared to $35.3 million during the year-ago quarter. However, adjusted EPS of $0.24 came in slightly below consensus expectations. Nevertheless, the strong revenue performance overshadowed the slightly lower EPS, and if this trend continues, the stock may continue to work from here.

Sea Ltd

As discussed below, the company's three operating segments showed strength across the board and represent encouraging signs for investors.

E-Commerce

E-Commerce revenue during the quarter grew an impressive 43% yoy to $3.2 billion, representing ~75% of the company's total revenue. The majority of the E-Commerce revenue came from Sea's marketplace, which came in at $2.8 billion, growing 43% yoy.

What's impressive about this is the core marketplace revenue growing 49% yoy to $2.0 billion. This is the company's transaction-based and advertising revenue, which is the core of the E-Commerce operation. Very strong results here are a positive indicator of a healthy consumer and marketplace, which has been one of the drivers behind the stock's strong bull run.

Importantly, the company's investments in building out its fulfillment centers across the world is showing signs of success. A few years ago, the E-Commerce business was solely focused on the SE Asian economies. As Sea has expanded to a more global presence, the company is seeing benefits of the marketplace gaining global traction. This is supported by Brazil achieving positive adjusted EBITDA for the first time.

Sea Ltd

In my opinion, one of the more impressive stats of the E-Commerce segment has been the material improvement in the company's take rate. Over the years, Sea has needed to invest across its global operations in order to support its expansion efforts. At the time, the macro environment was much more challenged, consumer spending and confidence was lower, and Sea's profitability was taking a huge hit.

This past quarter, the E-Commerce segment posted a take rate of 12.7%, which improved a material 60bps sequentially and 160bps yoy. While it's unlikely the pace of take rate expansion is going to continue at the current trajectory, the material improvement has helped drive strong profitability.

Adjusted EBITDA during Q3 came in at $34.4 million, significantly above the adjusted EBITDA loss of $346.5 million last year. Importantly, the company's "other markets," or those outside of Asia, generated positive adjusted EBITDA of $3.5 million, signaling the company's ability to become profitable across all geographies.

The company continues to focus on building out its competitive moat, which will be a key focus area over the upcoming year as international markets gain more traction. Management discussed this on the earnings call.

On the operations front, we remain committed to the same three priorities to deepen our competitive moats: enhancing our price competitiveness, improving our service quality, and strengthening our content ecosystem.

Price competitiveness continues to be a key value proposition that we bring to Shopee users. It is a strong anchor of our brand mindshare among buyers. In a recent survey conducted by Qualtrics, Shopee received the highest score among e-commerce platforms for good product prices in our Asia markets and Brazil.

On service quality, investing in end-to-end logistics integration across our logistics partners has given us a vital and structural advantage over our peers. Our buyers are happy with the cost savings we pass on to them and the better customer service we are able to provide. Our sellers also appreciate it, as we give them access to one-stop logistics solutions that are both reliable and cost- efficient.

I still expect the company to invest heavily into its E-Commerce segment and while profitability is now a reality, it is possible increased investments are needed in order to maintain, and even grow, the competitive moat. Signs of success in Brazil are positive and may ultimately drive the company to expand to other economies in Latin America.

Digital Entertainment

Digital Entertainment bookings grew 24% yoy to $556.5 million with adjusted EBITDA growing 34% yoy to $314.4 million, representing 56.5% of bookings, up from 52.2% of bookings in the year-ago period.

The key metric this quarter was the improvement seen in paying customer ratios. While quarterly active users grew 15.5% yoy to 628.5 million, paid customers expanded at a much faster pace of 24% yoy to 50.2 million. The paying user ratio thus expanded to 8.0% during the quarter, marking the third consecutive quarter at 8%+.

Sea Ltd

The ability for Sea to drive increased ARPU is essential for this business to grow. Free Fire remains the underlying driver of this business unit, and increased user engagement with this mobile game is showing signs of optimism. With >100 million daily active users, Free Fire was able to grow the user base 25% yoy.

Outside of Free Fire, the company is seeing growth potential coming from both international expansion as well as launching new games.

In addition to Asia and the Americas, we were happy to see meaningful growth in other regions such as North Africa over the past year. We view this region as a sizeable untapped opportunity and have been ramping up both in-game campaigns and out-of-game events in these markets.

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 number 1 most downloaded racing game in all three 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.

While success is not guaranteed here, it appears there are more legs to the growth story now compared to years prior, when Sea relied on Free Fire much more. The company will need to continue investing in their expansion opportunities, which may at time drive volatility in profitability, though early signs of momentum here are positive and could be an indicator of future success.

Digital Financial Services

Digital Financial Services revenue grew 38% yoy to $615.7 million with adjusted EBITDA coming in at an impressive $187.9 million.

Impressively, the company's consumer and SME loans principal outstanding grew 73% yoy, with non-performing loans at only 1.2%, slightly improving from last quarter. The company has refined their risk policies over the past few years, which has helped the non-performing loans come down from 2%+ just a handful of quarters ago. Maintaining a strong book of loans is essential for this business unit to drive profitability, as a few bad loans can materially impact the performance.

Sea Ltd

As the macro continues to show signs of stabilization and improvement, the company's improved loan writing process puts them in a position to profitably grow this business.

Shopee’s large user base in our markets 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 access to retail deposits. All of this has let us scale up our credit business very quickly and profitably.

While a relatively small portion of Sea's overall business, this segment serves as an important value-add proposition for customers looking to finance purchases. The discipline over the past few quarters has driven meaningful improvement and will serve as an important offering as the company continues to expand further into international markets.

Valuation

Given the bull run in shares YTD, valuation here can be a bit tricky. The company's operational rigor has improved and results have been strong, especially on the revenue side.

Sea has done a great job improving margins and demonstrating its ability to be profitable. Over time, investors will want to see continued improvements in profitability and less volatility in terms of the company's investment cycle.

Data by YCharts

YTD, the company's revenue growth is 25% with Q3 growth of 31% showing the potential for acceleration. If the company were able to maintain a 30%+ revenue growth profile on top of continued margin expansion, a more premium valuation may be warranted.

While it is difficult to argue that the stock should trade at 40x adjusted EBITDA or 5x revenue, Sea has done a tremendous job improving the investment rigor, global expansion, and expense control. As the company continues to execute towards its plan, investors may continue to place a premium on the stock's valuation.

I remain bullish at current stock levels because of the company's ability to demonstrate its strong execution. After several years of re-investing into the business to expand globally and improve operations, positive results are starting to be felt.

Maybe more importantly, Sea is viewed as a growth stock. The most important part of a growth stock is revenue growth, which Sea is showing signs of strength. When the company's revenue growth was pressured a few years ago, the multiple contracted. Given the strength in recent quarters and the company's bullish commentary around spending trends and internal operational improvement, we may continue to see strong growth trends over the coming quarters. Q4 also encapsulates the all-important holiday season. A big beat during Q4 may drive upside to the stock near-term, and give investors more confidence in growth trajectory longer-term.

At current levels, the E-Commerce segment, which has been the largest outperformed and most impressive business unit, becomes even more important for an investment decision. Ongoing outperformance here could drive the stock much higher. My bullish thesis also partially hinges on consumer spending trends remaining healthy. The E-Commerce segment is a great indicator of consumer spending health. Internal improvements and directed investments towards customer engagement have helped accelerate growth here, but a strong consumer could propel this business unit much higher over the next 12 months, which could ultimately drive the stock's multiple even higher.

I remain bullish on the shares long-term, despite the strong YTD performance. Sea represents a strong growth name investors should keep their eye on, especially as E-Commerce driven companies can be subjects of quarterly volatility based on GMV flows and profitability.

One of the biggest risks to this investment is the health of the consumer. As seen in 2022, a weaker consumer spending environment caused revenue growth to materially decelerate, thus an underperforming stock. Given some of the high fixed costs across the business, a decelerating revenue growth profile could drive meaningful losses on the bottom-end. Another large risk to be aware of is the company's international expansion efforts. Yes, these investments have been positive so far and the company is seeing strength in new regions, such as Brazil. However, entering new markets is never easy and success is one market does not equate to success in other markets. These investments will need to be targeted and refined over time in order to be successful.