As the threat of tariffs intensifies and the stock market continues to decline, many stocks are losing significant value. However, one company is defying this trend: SEA Limited, an e-commerce and tech-gaming company focused on Southeast Asia. SEA's stock is currently on the rise. The company reported earnings this morning before the market opened, and investors were pleased with what they had to say. So, could SEA Limited be a safe haven amidst all this uncertainty? Let’s explore that in the next few minutes.
So, let’s dive into SEA Limited's Q4 results. The company, valued at around $77 billion, saw revenue increase by 37%, beating analyst expectations. Management had projected a mid-20% growth in Gross Merchandise Volume (GMV) from its e-commerce platform, Shopee. In reality, GMV grew by 28% for the year, outperforming that target. They also forecasted 30% growth in bookings for their gaming unit, Garena, which mainly focuses on the game Free Fire. The actual bookings growth came in at 34%, exceeding expectations.
Earnings per share were 39 cents, which is a significant improvement from last year, though it did miss analysts' estimates. We’ll touch on that shortly. When it comes to margins, there’s a lot to like. Gross margins expanded by over 200 basis points year-over-year in Q4. Operating and net margins swung from losses to gains, which is a positive sign. Free cash flow surged more than fourfold, net income turned positive, and the balance sheet is in strong shape.
Now, let's break down the income statement. Total revenue grew by 37%, while the cost of revenue increased by only 31%, which resulted in a larger gross profit. This demonstrates operating leverage at work, with a 45% growth in gross profit. Looking at the segments, we see that digital entertainment (Garena) saw its gross margins increase slightly from 68.5% to 69.4%. Meanwhile, the e-commerce and fintech segments, which include Shopee and SEA Money, saw notable margin expansion from 41.5% to 45.7%.
Operating income grew by 20%, but it lagged behind the overall revenue growth. Operating expenses, including sales and marketing, general and administrative costs, and provisions for credit losses, increased as well. Nevertheless, operating income turned from a loss into a $36 million gain. Net income also improved, though it’s worth noting that the number of outstanding shares grew by 1.7%, which is a slight dilution but not excessive.
SEA Limited has three core business units: Shopee (e-commerce), SEA Money (fintech), and Garena (gaming). It’s crucial to understand how each of these segments performed. To break it down, I’m using Finch, a tool I use every day. If you want to try it, just click the link in the show notes below. On Finch’s platform, under the "Financials" tab and "Segments and KPIs," we can see how SEA's revenue is divided across its segments. The blue portion represents Shopee’s e-commerce revenue, the orange represents SEA Money, and the green shows revenue from Garena's gaming operations.
As we can see, Shopee is the largest contributor to SEA’s revenue. The growth rate for Shopee's revenue, which had plateaued around 16% in late 2023, is now accelerating. Last quarter, Shopee saw a 43% growth, with a slight dip to 41% in this most recent quarter—still strong.
Next, let’s look at SEA Money, which focuses on fintech services. Its growth rate had plateaued at 21%, but now it’s seeing a remarkable 55% growth in revenue, driven by the expansion of its credit products. While that boosts revenue, it's important to monitor non-performing loans, which I’ll address in a moment.
Finally, Garena, the gaming unit, may seem like a small player, but it’s worth noting that its revenue, after some time in decline, is now positive once again.
So, while SEA Limited’s gaming segment may not be growing as rapidly as the others, the company’s performance overall, especially in e-commerce and fintech, is quite impressive and may offer stability during uncertain times.
In fact, the last time Garena showed positive growth was back when we were emerging from the pandemic in March 2022. So, this marks an important milestone: Garena's revenue is growing year-over-year once again, which is a significant shift since it’s been a while since we’ve seen this kind of performance. So, why is Garena such a key focus?
next, I’ll show where the company’s profits come from. You’ll notice that Garena, marked in green, has been the primary contributor to the company's profits for a long time. This makes sense, as Garena is an established business, with Free Fire being a key game that generates profit without needing constant reinvestment. For much of the last four years, SEA Money (in orange) and Shopee (in blue) have been money-losing ventures, which is typical for growing businesses that are building out infrastructure. However, the fact that Garena is profitable is very important.
Let’s zoom in on Garena’s operating profits, which, as mentioned, grew for the first time since March 2022. SEA Money is also showing positive trends, with a 47% growth in revenue—this is fantastic! As for Shopee, while it’s been unprofitable for the past five quarters, it generated $80 million in operating profit this time around, which is a great sign.
What’s particularly useful about Finch is that it gives us detailed segment performance indicators. Let's focus on Garena, since it remains a major profit generator. Now, what exactly are bookings? Bookings refer to the money customers pay upfront, but it only becomes recognized revenue when players use the funds in the game. This is likely a more accurate reflection of Garena’s performance. Bookings grew by 19%, a bit slower than the previous quarter, but management expects double-digit growth to continue. This is good news for shareholders as long as the growth remains positive.
Another key metric is the number of quarterly active users. Since Free Fire is a premium game, users don’t always have to pay, but it’s encouraging to see growth here—up 177% from the previous year. Additionally, the number of free users converting to paid users grew by 27%, which is another positive indicator for Garena's future.
Next, let's examine Shopee's e-commerce performance. Gross merchandise volume (GMV), which reflects the total value of goods sold on Shopee, was $28.6 billion for Q4. There had been a gap in reporting this metric previously, but now we’re seeing consistent growth again. This quarter’s GMV growth was 24%, slightly down from 25% in Q3, but still strong.
We can also track the number of orders placed, which grew by about 20%. This shows that while GMV is growing, the average order value is rising as well, which is a positive trend.
Looking ahead to the first quarter of 2025, management’s guidance indicates 20% GMV growth and double-digit bookings growth for Garena. This is solid, and if they can maintain this pace, it’s a positive sign for the company’s performance.
Now, let’s look at some key metrics for the future. First, I’ll be watching GMV growth. Second, the Shopee take rate is crucial. If revenue from Shopee grows faster than GMV, that’s a good sign of a competitive advantage, or a "moat." Management mentioned higher commission and ad rates, which signals that the company has pricing power and is expanding its moat.
I’ll also keep an eye on operating margins and non-performing loans (NPLs). NPLs accounted for 1.4% of the loan portfolio in Q4, which is healthy, but it's important to monitor. If NPLs rise, it could threaten future profitability and revenue growth.
Overall, these are the key factors I’m focusing on. I believe the company’s competitive position is strengthening, and the investment thesis remains on track.
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Now, let’s talk about the valuation of SEA Limited. I’ll head back over to FinChat to review a few key metrics. First, we can look at the company’s forward-looking price-to-sales ratio, which is about 3.7x forward sales. This is in line with the company’s performance over the past five to six years.
Next, we can examine the company’s forward price-to-earnings ratio. Currently, it’s around 37x forward earnings, but this can be a bit misleading since the company isn’t yet profitable. That said, it’s higher than it’s been over the last two years.
Finally, we can look at the company’s forward price-to-free-cash-flow ratio. It’s currently about 35x forward free cash flow. While this number doesn’t provide a ton of historical context, it does give us a good sense of where the company stands.
One of the best ways to assess a company’s valuation, though, is through a reverse discounted cash flow analysis. To do that, we can start by noting that SEA Limited has a 19% free cash flow margin, meaning it generated about $3.2 billion in free cash flow over the past year. To justify its current stock price, how much does that free cash flow need to grow each year?
The answer is that it really only needs to grow around 10-11% annually. Honestly, I believe that over the next 10 years, SEA Limited could achieve a higher free cash flow margin, possibly around 25%. In that case, the company would generate around $4.2 billion in free cash flow, and its revenue would only need to grow at about 6-7% per year. Analysts are currently projecting 22% revenue growth for this year and 15% for the next, so the outlook is quite promising.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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