- Sea's Garena still holds a lot of potential for further growth and profitability.
- The company's business is supported by secular growth trends.
- The MSCI inclusion should act as a near-term catalyst.
In my latest article on Sea Limited (NYSE:SE), I discussed the overall business opportunities of the company, and why I am bullish on this Southeast Asian growth story. Today, I'd like to expand on this analysis, offering three more reasons why you should consider adding SE to your portfolio if you haven't yet. One relates to the core business potential, another looks at shifts in market dynamics, and the last one is an upcoming catalyst that could easily send the stock up in the next few weeks.
Sea: The undisputed King of eSports
First and foremost, I'd like to talk about Garena, which constitutes the "Digital Entertainment" segment of the company. As I pointed out already, Garena and Free Fire are the crown jewels of SE. Its revenues are growing fast and it is the main source of cash flow for the company. The question I posed before was; what if the company can't replicate the success of Free Fire? This is certainly a risk, but today I'd like to look at the opportunities by instead asking: What if SE can leverage its audience and further grow and monetize Garena?
In this regard, we saw some very encouraging news last week at Garena World's first virtual edition, which drew in over 1.2 million attendees and 40 million viewers. The event showcased the kind of fanaticism that Garena creates, and it was an opportunity for the company to cement its leadership position as an eSports organizer, and showcase two of its upcoming games, "Undawn" and "Fantasy Town".
I am trying to point out here that SE is, by some measures, the most successful eSports company in the world (Free Fire was the most downloaded game of 2020). The eSports segment is growing fast, and SE is set to ride this wave:
According to data from Statista, the eSports market could achieve close to $1.61 billion in revenues by 2024. This implies a CAGR of over 14% from 2021 to 2024. Furthermore, we have to understand that eSports has a lot of potential due to its target demographic.
Gaming and eSports are especially popular with the younger generations, specifically people in their teens, twenties and early thirties. In 5-10 years though, this demographic will be the main revenue creators and spenders in the economy, which bodes very well for SE. It might seem ludicrous now, but a world where top eSports competition garners the same levels of viewership and revenue as the NFL is in the cards.
So, while Garena's Free Fire success could be hard to replicate, the more important thing to focus on is the fact that Sea is one of the most relevant companies in one of the fastest-growing market segments right now. SE is often compared to Amazon.com (AMZN) or Alibaba Group Holdings (BABA), but it also has all the makings of a future Tencent Holdings Limited (OTCPK:TCEHY).
Momentum is shifting
Moving on to another segment of the business, digital commerce, we have seen some very encouraging results coming from companies in this sector, which makes me more bullish than ever on Shopee's prospects. Shopify Inc. (SHOP), which I wrote about here has had an outstanding quarter, beating on revenue and non-GAAP EPS. Granted, Shopify and Shopee are not the same, but it is still encouraging to see that, in what is known to be the weakest quarter of the year, Shopify doubled its GMV.
But this trend is not limited to Shopify. Amazon, which I think is a better comparison to SE, saw revenues increase by 44%. What we are seeing is clear evidence that COVID has brought about a real and long-lasting shift in consumer spending, accelerating the move to online. According to Statista, worldwide eCommerce GMV could reach $6388 billion by 2024, and SE stands to gain massively from that, given its presence in South East Asia and now Latin America.
Shopee is the go-to marketplace for consumers in these areas and has grown GMV by 113% in the last year. While profitability is still an issue, companies like Amazon are proof that margins in this sector, while thin, are possible. For now, Shopee has to focus on growing its size, which it can do thanks to all the free cash flow generated by Garena.
Lastly, as I mentioned in the introduction, I would like to mention one significant catalyst that SE could experience in the next weeks or months. Starting in May, the stock is now eligible for inclusion in the MSCI Singapore Index, which tracks the performance of large- and mid-cap companies in the Singapore market. The inclusion of SE in the index could lead to significant inflows of capital into the stock.
With Sea assumed to hold the largest weight in the index post-rebalancing at about 20 per cent, its stock would take over the current top position of DBS. This could potentially translate into US$2.5 billion in passive inflow, said CGS-CIMB based on its estimates.
With that said, CGS-CIMB proposes a price target of $315 for the stock based on this inclusion as well as higher gaming multiples and higher monetization at Shopee.
We have known about the possible inclusion for a while, and SE stock did jump over 8% when this possibility was first announced back in November, but now it is becoming reality, and demand for the stock will literally and automatically increase once the stock is included in the MSCI.
It's clear, in my opinion, that Sea Limited has a bright future ahead of it. As I already mentioned before, SE is still growing fast, and I am especially encouraged by the investment prospects brought about by Sea Capital. On top of that, we have secular trends underpinning growth in eCommerce and eSports, and the imminent catalyst of the MSCI inclusion. I suggest you act now before it's too late.
This article was written by
James Foord is an economist by trade and has been analyzing global markets for the past decade. He leads the investing group The Pragmatic Investor where the focus is on building robust and truly diversified portfolios that will continually preserve and increase wealth.The Pragmatic Investor covers global macro, international equities, commodities, tech and cryptocurrencies and is designed to guide investors of all levels in their journey. Features include a The Pragmatic Investor Portfolio, weekly market update newsletter, actionable trades, technical analysis, and a chat room. Learn more.
Analyst’s Disclosure: I am/we are long SE, SHOP, BABA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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