Amazon’s journey from a humble online bookstore in 1994 to a global e-commerce giant dominating various industries today is nothing short of remarkable. While its primary revenue stream remains e-commerce, the company has diversified into streaming, digital advertising, cloud computing, and more.
Over the past decade, Amazon’s stock has witnessed significant growth, reflecting its expanding business ventures and market dominance. Despite facing challenges and controversies along the way, Amazon’s success story continues to inspire.
Interestingly, Sea Limited (NYSE: SE) mirrors Amazon’s early trajectory. Like Amazon, Sea started primarily as an e-commerce platform but has since expanded into various sectors within the technology industry, including digital entertainment (gaming) and digital financial services.
Currently trading at around $59 per share, Sea holds a market valuation of $33.5 billion. Given its growth potential and trajectory, some analysts believe that Sea’s stock could potentially increase tenfold over the next decade. For investors who may have missed out on Amazon’s early growth, Sea presents an enticing opportunity to capitalize on a company with similar growth prospects.
However, as with any investment opportunity, it’s essential for investors to conduct thorough research, assess risk factors, and consider their investment objectives before making any decisions. While Sea Limited shows promise, investing always carries inherent risks, and prudent decision-making is crucial for long-term success.
The Amazon of Asia?
Jeff Bezos’ foresight regarding the shift to online shopping was indeed ahead of its time, recognizing the unparalleled convenience the internet brings to consumers. This trend towards digitization is expected to persist well into the future. Sea, headquartered in Singapore, operates in Southeast Asian markets such as Indonesia, which are in earlier stages of transitioning to e-commerce compared to more mature markets like the U.S.
Sea’s primary revenue driver is its Shopee app, which operates as a hybrid consumer-to-consumer and business-to-consumer e-commerce platform. Similar to Amazon, Shopee prioritizes reducing logistics costs and improving delivery speeds. In the fourth quarter of 2023, Sea reported a 12% reduction in logistics costs per order in Asia, attributed to increased automation and operational enhancements. Notably, in Indonesia’s economic hub of Java, over half of e-commerce orders were delivered within two days in December.
However, Sea’s digital entertainment segment, anchored by the Garena game development studio, has been a drag on the company’s overall performance. Despite titles like Free Fire and Call of Duty: Mobile being popular, the segment experienced a decline in activity since the peak of the pandemic, leading to decreased revenue. Nevertheless, Free Fire remained the most downloaded mobile game globally in 2023, with momentum continuing into 2024. Additionally, Garena’s quarterly active user base grew by 8.9% year-over-year in Q4, suggesting signs of improvement.
Sea Money, the fintech arm of Sea, plays a pivotal role in the company’s ecosystem. It offers digital banking services, small loans, and a buy now, pay later format to consumers. Furthermore, Sea Money finances merchants on the Shopee platform, facilitating their growth, which in turn benefits Sea’s e-commerce segment.
Sea Limited’s revenue growth decelerated in 2023, but there’s more to the story
Sea achieved a record-high revenue of $13.1 billion in 2023, marking a year-over-year increase of nearly 5%. While this growth rate represents a slowdown compared to the significant growth seen in previous years (25% in 2022 and 127% in 2021), it’s worth noting that the company strategically engineered this deceleration by focusing on cost-cutting measures to achieve profitability.
The decline in revenue was primarily attributed to the digital entertainment segment, which experienced a 44% decrease in revenue during the year. In contrast, e-commerce revenue grew by 24%, and digital financial services revenue saw a remarkable increase of 44%. Despite being the smallest segment in terms of revenue ($1.8 billion in 2023), digital financial services is quickly catching up to digital entertainment ($2.2 billion) due to its substantial growth rate.
The significant reduction in operating expenses by 16% in 2023 led to Sea’s first-ever annual profit, amounting to $162.7 million, a remarkable turnaround from the $1.6 billion net loss recorded in 2022.
While Sea’s profitability on a quarterly basis remains variable, analysts on Wall Street are optimistic about the company’s prospects, expecting accelerated revenue growth of around 13% for the current year. This anticipated growth trajectory is expected to contribute positively to the bottom line, assuming that operating margins remain stable or improve.
Why Sea Limited could soar tenfold over the long term
Sea Limited’s current valuation presents an intriguing opportunity for investors, with its price-to-sales (P/S) ratio at just 2.6, near its lowest level since going public in 2017 and well below its peak P/S ratio of 22.9. Even with a conservative assumption of returning revenue growth to 20% on average over the next decade, Sea could potentially generate $81 billion in annual revenue by 2034.
At its current valuation, this would value the company at $211 billion. However, there’s also the potential for multiple expansion, where investors assign a higher P/S ratio to the stock due to more consistent growth and profits. While Sea’s peak P/S ratio of nearly 23 may not be achievable, even a modest uptick to 4.1 would value the company at $335 billion, translating into a tenfold return from its current valuation.
Amazon serves as a precedent, with its revenue growing at a compound annual rate of 23% over the past decade, accompanied by a significant increase in its P/S ratio. While several factors need to align for Sea to realize this potential, including achieving at least 20% revenue growth, the company’s e-commerce and financial services segments are already surpassing this threshold, with signs of recovery in its gaming business.
Therefore, investors who missed out on Amazon’s massive growth since 2014 may find a comparable opportunity in Sea Limited stock if they choose to invest today.