September 18, 2023

Investment Thesis Simplified: Sea Ltd.

The Ten Sea Commandments

  1. Shopee remains the #1 ecommerce platform in SE Asia. It is the only profitable one. Lazada is the #2, and this is a Rocket Internet Startup that existed before Shopee but has since been surpassed by Shopee by a very long shot. Shopee is indisputably the best ecommerce platform in the region, and, again, it's the only profitable platform.
  2. In the U.S., Walmart, Amazon, Target, Lowe's, Home Depot, Dollar General, grocery stores, and department stores have all co-existed and created trillions in equity value over the last 75 years.
  3. In Latin America, MercadoLibre has co-existed with a host of rivals, including Amazon quite formidably in Latin America, and it has still done very well profitably. Notably, MercadoLibre only has 35% market share of total ecommerce GMV in Latin America, while Sea has 50% in SE Asia; yet there's no fevered panic over MercadoLibre's market share.
  4. Sea has $7.7B in cash & equivalents; $3.3B in convertible debt. This is a massive amount of resources with which it can further dominate the aforementioned unprofitable and historically stagnant/inferior competition. Sea also generates robust free cash flow quarterly now alongside its giant liquidity position on its balance sheet.
  5. Sea owns Garena, which is now returning to growth. This is like Sea's AWS (AMZN) in a sense, giving it an advantage over rivals. Garena could also experience sales growth in the future, especially in light of Free Fire being unbanned in India recently. Garena produces about $1B in annualized cash flows for the conglomerate.
  6. Sea has a FinTech business (Sea Money) with about 60M users on the platform. This alone could be worth $20B to $30B, and Sea currently trades at ~$18B in enterprise value (preposterous in my opinion). This is a rapidly growing, free cash flow generative business that provides core financial infrastructure to SE Asia's digital economy alongside a couple other rivals, including GoPay (GOTO) and OVO (GRAB).
  7. SE Asia has a very, very long runway for growth demographically. The region is still in the very early innings of economic growth and development.
  8. Sea has demonstrated an ability to successfully and organically (meaning without acquiring) build new products and scale them rapidly. While it's built three incredibly successful franchises over the last decade or so, i.e., Garena (500M+ users and highly profitable), Shopee (#1 ecom platform in SE Asia and only profitable one), and Sea Money (~60M users and profitable), it's highly likely that it creates new and compelling products in the future as well, adding to the 20-30% annualized growth I believe the conglomerate will achieve in the decade ahead, once we emerge from the current rate hiking cycle and Asian economic woes broadly, both of which have served to, on some level, halt the growth of SE Asia's tech sector momentarily.
  9. Lastly, SE Asia's demographics are very favorable for sustained, elevated growth for Sea in the decades ahead (depicted below).
  10. L.A. Stevens asserts that Sea will likely produce 10x returns, or a return profile of similarly significant note, in the decade ahead.

Substantiating Graphics: MercadoLibre's Market Share Vs Sea Ltd.'s Market Share

The chart immediately below depicts Total Ecommerce GMV in Latin America:


Notably, it is expected to grow at elevated rates for the foreseeable future.

The chart below depicts MercadoLibre's total GMV, which accounts for just about 35% of total ecommerce GMV in Latin America:


Next, let's assess Sea's market share.

Below, we can see that Sea holds roughly 48% ecommerce market share in SE Asia by GMV.


And, below, we can see the growth of this ecommerce GMV in SE Asia:

Total SE Asia Ecommerce GMV

L.A. Stevens postulates that Sea's growth issues are much more a byproduct of overall tech and ecommerce slowing in SE Asia as opposed to any competitive threats.

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