Sea is Operating at the Edge
The e-commerce and gaming conglomerate was worth more than $200 billion a year ago. It has since lost $177 billion of its peak market cap and is leaving key geographies – but it still has one of the h
Brought to you by Sardine
Fraud isn’t a problem until it becomes your only problem.
Scaling your business for growth means strengthening fraud prevention, having the right tools in place for customer onboarding and compliance, and creating better customer experiences.
But doing all these things is hard and they typically require months of implementation across multiple vendors which comes with headaches & increased costs.
Sardine was created to scale your business.
Combine risk, compliance, and payment protection to increase your customer satisfaction, trust, and loyalty – all from one API.
The leading fraud prevention and payments provider protects your customers from malicious scammers while improving your conversion rates. Companies like FTX, Brex, AtoB, MoonPay, Autograph and others use Sardine to stop fraud and increase revenue.
Implement Sardine today and scale your revenue without the fear of fraud.
If you only have a few minutes to spare, here's what investors, operators, and founders should know about Sea Limited.
A tough year. It has not been a happy 2022 for Sea. The company lost $177 billion of its peak market cap, retreated from Europe and Latin America, and laid off staff. Losses swelled from $24.1 million to $506.3 million on an adjusted EBITDA basis.
Resembling Amazon. Sea’s shorthand during the last bull cycle was “Amazon for Southeast Asia.” There’s some validity in that comparison. Just as Amazon uses AWS’s free cash flow to fund e-commerce growth, Sea relies on gaming division Garena to fuel Shopee’s expansion.
The fate of Free Fire. Much of Sea’s available cash comes from Free Fire, a battle royale game and global phenomenon. After dominating the charts for three years and grossing billions, Free Fire’s user base and bookings have started to fall. Sea will hope to arrest its slide.
Stabilizing Shopee. Though Sea’s e-commerce arm continues to lose money, there are signs of promise. Losses per order have improved from $0.41 to $0.33. In Shopee’s most mature markets, it is operating close to break even. Sea will need to show a similar trajectory in Brazil, a newer market, to justify its presence.
The upside of SeaMoney. Though a small part of Sea today, the fintech division SeaMoney could prove influential over time. With 70% of the Southeast Asian population either unbanked or underbanked, there’s a significant need for a tech-forward financial institution. If Sea plays its cards right, it could build the region’s version of Ant Financial.
One year ago, Sea Limited was on top of the world. The markets valued the Southeast Asian gaming and e-commerce conglomerate at more than $200 billion, surpassing established peers like Mercado Libre. Gaming division Garena printed money thanks to the hit franchise Free Fire, while Sea’s e-commerce division, Shopee, leveraged those earnings to devour share in cities around the world, including Jakarta, Rio de Janeiro, Ho Chi Minh, and Bogotá. The productive use of free cash flow drew favorable comparisons with Amazon and AWS, with Sea portrayed as a perfect market machine gathering speed in regions with potent secular tailwinds.
The weather has turned against Sea over the past twelve months. Like other pandemic darlings and high-growth tech stocks, its valuation has plummeted, hovering around $26 billion. Layoffs have accompanied this market cap evisceration, with 3% of Shopee employees dismissed in a recent round of departures. As its e-commerce division retreats from markets like Mexico, Colombia, and Chile, global sensation Free Fire is also losing its luster, with declining active and paying users. Some think finding a replacement of similar magnitude may be difficult, given gaming’s alchemic properties.
Taken together, Sea appears to be at a crucible moment. It is an ambitious, innovatively structured organization facing mounting losses and moneyed competitors. Such dueling dynamics make predicting Sea’s future a kind of financial Rorschach, encapsulating the observer’s views on e-commerce penetration speed, China’s technological stance, the repeatability of game development, and the intransigence of Alibaba. For one subject, the pattern of blots predicts a difficult future, defined by immoderate spending – profitability always a few years away. For another, the arrangement portends eventual supremacy, with the current interlude unpleasant but necessary.
The reason such disparate futures feel similarly feasible is a product of Sea’s past. Since its founding in 2009, Sea has not been one company but many, sometimes simultaneously. The Singaporean outfit has evolved from scrabbling game publisher to dazzling hit machine to rabid shopping app to crafty neobank. It has been inventive and reductive, subtle and blunt. Just as the fantastical capitals of Italo Calvino’s Invisible Cities were all portrayals of Venice in the author’s mind, Sea is a structure of compressed variation. From one year to another, one quarter to the next, the firm's emphasis can finely but meaningfully change.
Sea’s variability is not a consequence of flightiness or fuzzy thinking. Instead, it indicates the company’s extreme pragmatism and CEO Forrest Li’s talent for identifying what Sea needs at different stages of its maturation. Like a deft Formula One driver, Li seems to have an unusual skill for picking when to accelerate and when to pull back, when to attack and when to coast. His record suggests that Sea’s 2022 may prove more blip than breakdown – but there is not much room for error. Though it may not be able to move as aggressively as in the past, Sea is still in a cage fight with rivals, and even the most exuberant of investors cannot stomach endless losses. This is a company that gives the impression of constantly operating at the edge of its capabilities.
In today’s piece, we’ll explore this aspect of Sea’s nature. We’ll also discuss:
The machine. Sea is an unusual construction composed of gaming, e-commerce, and payments. While there are few synergies between these units organizationally or at the product level, there is a kind of economic harmony.
The state of play. After a teeth-chattering ascent during the pandemic, Sea has fallen back to earth over the past twelve months. It now appears to be a business in flux, prioritizing profitability but burning aggressively.
The future. Sea sits at the intersection of several growing markets. Favorable sectoral tailwinds and the company’s formidable execution ability mean it may have plenty of room to grow. The key to capturing the opportunity will be improving e-commerce unit economics, layering on fintech revenue, and finding another gaming hit.
This piece draws on interviews with former and current employees, investors, and peers. Unless explicitly noted, all contributed on the condition of anonymity.
There’s no company quite like Sea. Though it resembles Tencent, Alibaba, Mercado Libre, and Amazon to differing degrees, none are directly analogous. Its unusual construction of gaming, e-commerce, and fintech is a consequence of its history.
It all started with Garena.
In 2009, Forrest Li, Gang Ye, and David Chen started a company. All three were Chinese nationals based in Singapore with a shared love of gaming. Together, they decided to create a “global arena” for PC players, an aspiration that, when shortened, gave them their startup’s name: Garena.
Though universal in its aspiration, Garena gained strongest traction in Asian countries. Its “community for gamers” appealed to consumers looking for a simple platform to play popular PC games like Call of Duty and socialize with other gamers. Within its first year, Garena registered 23 million users.
Garena’s network optimization was critical to this success, enabling players in low-bandwidth countries to compete against those in more developed markets. In an early interview, Li emphasized the importance of this capability: “The feature can reduce latency and data loss for online gameplay and make it possible for a gamer from Singapore to play against a gamer from Vietnam.” An appreciation for the technical limitations of its target markets would become a trademark of Garena.
The following year proved even more consequential, with Garena sealing a publishing partnership with Riot Games to distribute their games in the Southeast Asian market. Regional control over League of Legends pushed the company to profitability within two years and cemented it as a trusted partner for other developers, winning the rights to franchises like FIFA. Tencent (Riot’s owner) promptly invested in Garena, eventually accumulating a 40% share. Garena also earned the rights to distribute Tencent's impressive catalog of games.
The role of a publisher is a kind of stewardship. Companies like Garena are tasked with localizing and distributing different games, a challenge that requires local connections and expertise. The excellent series from the Punch Card Investor newsletter notes that Garena helped bring Southeast Asian footballers onto FIFA, for example. The publisher’s goal is to help a title thrive in local markets.
In less ambitious hands, Garena might have continued on this trajectory, establishing itself as the preferred publisher in Southeast Asia, growing along with the broader industry. Forrest Li was not content with such an outcome, however. Recognizing that the developers of a successful game earned considerably more than the publishers, Li targeted creating a franchise of his own.
Some developers toil for years before finding a hit. Slack and Discord famously stemmed from their founders’ failure to create a successful game, illustrating that the sector can stymie even outstanding entrepreneurs. Garena smashed it out of the park the first time it stepped up to the plate. In late 2017, Sea released its inaugural game: Free Fire.
Garena was a very different company by then. Indeed, it had changed so much that it was no longer called Garena – or at least not only known by that name. After rolling out e-commerce and fintech divisions to supplement its gaming business (discussed later), the company renamed itself Sea Limited, reflecting its geographical focus and perhaps the vast opportunities ahead. It went public under that name in October 2017, debuting with a valuation of approximately $4 billion. Despite the significance of listing on the NYSE, hindsight tells us that Free Fire’s launch around the same time was the more important event.
The game’s creation involved considerable strategy. The success of titles like PUBG and Fortnite made it easy for the Garena division to settle on a battle royale structure for Free Fire. Sea’s creativity came when considering the technical requirements of the product. Knowing Western games ran poorly on low-spec phones, Garena built Free Fire to function well in environments with low bandwidth. For social games, this is particularly important. As one gaming entrepreneur remarked, there’s a tendency to coalesce around the title that runs best on the worst device within a friend group. If your social circle is split between the U.S., Singapore, and Thailand, for example, and you all want to play a game together, you need one that works in Bangkok. Free Fire was devised for this reality.
Though plenty of thought went into Free Fire, that doesn’t mean Sea didn’t hedge its bets. The company funded a handful of internal teams to build a game in the hopes of landing a hit. When they settled on Free Fire, they released it under the banner of “111dots Studio” in Vietnam, giving the company a chance to gauge consumer response without more extensive fanfare.
“There was a sense it would do well,” one source said of Free Fire’s early days, “But not at the scale it did.”
The following year, Free Fire ignited, capturing share across Southeast Asia and beyond. Consumers appreciated the app’s performance in local environments, and the addictive social gameplay contributed to viral adoption. By the end of that year, Free Fire had grossed $118 million and reached 60 million downloads. Management believed the game had global potential, but they had not forecast such rabid interest in Latin America, particularly Mexico and Brazil. Free Fire ended the year as the highest-grossing app of the year in Brazil, besting stalwarts like Netflix, Tinder, and Pokemon Go. As we’ll discuss, Sea capitalized on this momentum aggressively with its e-commerce division.
Free Fire’s momentum steepened in 2019. It ended the year as the most downloaded game in the world, besting the franchises it had emulated, including PUBG and Fortnite. That year, it also crossed $1 billion in lifetime revenue. It retained its title in 2020, though it was toppled the following year by Subway Surfers despite logging 154 million downloads. In 2021, it recorded an estimated $830 million in revenue, enough to be the eighth-highest-earning mobile game of the year.
Despite being designed for lower-bandwidth environments, Free Fire would even make inroads in the U.S. In Q1 of last year, it was the country’s top-earning game, pulling in $100 million. That put it ahead of PUBG, which led global revenue. Though more lucrative, a source remarked that the American user base has been particularly transient – departing the game at higher rates in recent months. Nevertheless, the fact that Garena pulled hundreds of millions out of a market it never planned to attack is symbolic of Free Fire’s success.
Over a decade ago, Sea began life as a community for gamers. Today, it is considerably more than that: the dominant regional publisher and developer of one of the world’s most popular games.
We tend to think of entrepreneurship as an act of vision. The farseeing builder is driven to follow an obsession and bring something new into the world. Though Sea’s founders may have had that internal motivation in starting Garena, Shopee’s creation was pure pragmatism.
The simple truth of it is that game publishers have a ceiling. One source noted that the largest pure-play publisher was Activision, currently valued at $57 billion. The company has only managed to reach that size through mergers and acquisitions, bulking up bit by bit.
From Garena’s early days, Li seemed aware of the industry dynamics. If he wanted to build a genuinely enormous business, he would likely have to add revenue streams. Given his savvy, Li would no doubt have sought sectors that could support centacorn-sized corporations with strong growth potential. He would also have considered which segments might offer reliable revenue, offsetting the sporadic bonanzas of the gaming industry. In 2015, Li made his move, launching Shopee in Singapore.
To an American consumer, Shopee appears dizzyingly creative. It is stuffed full of social features and aggressive gamification. For Asian audiences, however, much of this was not new. One source remarked it was effectively a copy-paste of Chinese e-commerce apps like Pinduoduo or Taobao, owned by Alibaba. The latter served as inspiration, with Li claiming he decided to build Shopee after his daughter said she missed the Chinese platform.
By Sea’s 2017 IPO, Shopee was already a strong player, leading Southeast Asia by GMV and total orders in the first half of that year. Nearly 10 million users came to the app each month, with more than a third checking in each day for an average of 22 minutes. Shopee knew how to attract and engage customers.
One might reasonably assume that Shopee’s engagement owed something to Garena. Who better to devise attention traps than the creator of a monster mobile game? According to several sources, however, there’s little direct interaction between Garena and Shopee. Employees from one division might migrate over to another, and Shopee advertises in Free Fire, but each unit operates independently for all intents and purposes. “There isn’t a synergy,” one source said bluntly.
Though it may borrow little of Garena’s product DNA, Shopee has economically relied on the gaming division. There is no doubt that Free Fire’s advent changed the e-commerce app’s trajectory. With hundreds of millions pouring in each quarter thanks to the hit game, Sea suddenly had money to burn. Starting in 2018, the company began to invest aggressively in Shopee’s growth, expanding its geographical reach and increasing marketing spend. This symbiotic relationship between a division with strong free cash flow and a valuable but high-burn division earned Sea comparisons to Amazon, with Garena playing the role of AWS. Though the comparison has some validity, it’s worth noting that mobile games are a much more chimerical segment than cloud computing services.
Beyond funneling Free Fire’s profits into Shopee, Sea used the game’s momentum to open new markets. After the battle royale took off in Latin America, Sea moved aggressively to roll Shopee out across the continent, beginning in 2019.
In core and new markets, Sea deployed extraordinary resources to advance Shopee’s growth. One source spoke of the “tremendous” war chest that fueled free delivery, heavy discounts, and pricey celebrity endorsements – margin structure be damned.
Beyond paying for market share, Sea also positioned Shopee cleverly. In Southeast Asia, Lazada was established as a more upmarket seller, with a male-leaning user base and a strong line of business in electronics. Mercado Libre was the clear leader in Latin America, and though it sold a wide range of SKUs, it could not be considered a low-cost retailer.
Shopee focused on extremely economical products. Rather than trying to win the customer buying a $100 pair of headphones, for example, Shopee sought the purchaser of a $5 t-shirt or $3 lipstick. According to one source, Shopee’s best-selling product is low-cost women’s underwear.
It proved a clever initial strategy. By offering cheap items, Shopee made it easy for customers to join the ecosystem and make frequent purchases, sacrificing average order value (AOV) for buying frequency. The company’s intensely gamified interface and social features also helped Shopee aggregate demand quickly. Over time, it improved the supply side of the equation, changing its mix from cheaper, lower-quality products to better SKUs with the aim of capturing higher AOV purchases, too. While Shopee is now building out in-house logistics through its Xpress arm, for most of its history, it has taken a lightweight approach, relying on third-party providers.
Fueled by Free Fire’s billions, Shopee’s strategy worked. The company devoured share in core markets and built a large business in Latin America. Within two years of its initial launch in the region, it has become the largest player by monthly active users, an imperfect measure. Still, it showed Sea’s money had not been wasted and meaningfully shifted the regional landscape.
Before launching Shopee, Forrest Li rolled out AirPay in 2014. It was his company’s first attempt to play in the financial services space. In the eight years since, Sea has expanded beyond AirPay creating a suite of financial products that sit under the SeaMoney division. This includes mobile wallets, point of sale, BNPL, merchant financing, and banking.
While the connection between gaming and e-commerce is not particularly clear, the synergy between a fintech and both segments is. In Sea’s S-1, the company highlighted AirPay’s importance to Garena and Shopee, serving as a payment processor for both. Synergies are obvious between SeaMoney and Shopee. Great businesses have mined the complementary space between e-commerce and fintech, including Mercado Libre, Kaspi, and Alibaba. Sea will hope it can develop this division into its own Ant Financial.
Critically, SeaMoney gives Li’s conglomerate a foothold in a prominent growth market. Fifty-nine percent of Southeast Asia's gross transaction volume (GTV) is conducted in cash, while just 4% occurs via the kind of digital wallets SeaMoney offers. More than 70% of Southeast Asia is unbanked or underbanked. The minority that does have financial services often rely on more analog institutions. While this market is less mature now, Sea is positioned to prosper as it develops.
It is already a substantial business unit. In its latest quarter, SeaMoney reported approximately 53 million quarterly active users, an increase of 53% year-over-year (YoY). Payment volume reached $5.7 billion for the quarter, an uptick of 36% over the same period.
State of play
Sea peaked by investing a hit game’s earnings into secondary business lines. The durability of that approach has come under questioning this year, with Garena and Shopee showing vulnerabilities. Before we assess what Sea’s future might look like, we must understand the state of play.
Gamers can be fickle. One study on top-grossing mobile games between 2014 and 2017 showed that consumers played a game for an average of 27.5 days. A third of the games that made it into the top fifty highest-grossing titles in that period held their spot for just a day. Since that research was conducted, competition has only escalated.
In the context of Free Fire, data like this can be interpreted differently. On the one hand, Garena’s creation has already proved to have exceptional staying power, remaining in the top ten for multiple years. At the same time, it also illustrates that most games tend to have a shelf life and will eventually decline.
Recent signs suggest Free Fire may be on its way down. “I’ve heard people call it Free Fall,” one source said. Quarterly active users (QAUs) fell 15% YoY across the Garena division, hitting 619 million. Paying users declined even more sharply, dropping 39% from 92.2 million to 56.1 million, translating into a brutal 40% decline in bookings over the same period. While Sea doesn’t break out what percentage of revenue comes from Free Fire, it undoubtedly contributes a majority share, with some suggesting it’s roughly 70%. Adjusted EBITDA fell from $741 million to just $333.6 million.
In February, the Indian government decided to ban Free Fire as it purged “Chinese apps,” never mind that Garena is based in Singapore. The market reacted strongly to the news, slashing Sea’s market cap by $16 billion, its largest single-day drop. Though Free Fire was the highest-grossing game in India, the country contributed just 3% of Garena’s revenue and 1.2% of its total revenue – perhaps an indication the market overreacted or a sign of how valuable some thought the country might become to Sea.
That was not Sea’s only skirmish for the year, with Krafton, makers of PUBG, suing the firm, alleging Free Fire infringed on its copyright. While this complaint was made in the U.S., a similar suit was brought in Singapore in 2017, which was ultimately settled. Sea will hope a relatively amicable conclusion can be brokered here as well.
Despite headwinds, there’s reason to be optimistic about Free Fire’s potential. It remains Southeast Asia and Latin America’s most popular title, indicating that recent pullbacks perhaps reflect broader shifts. Krafton’s Q2 revenue also fell from a year earlier, declining 7.7% – a more modest drop.
Additionally, although games can have a short shelf life, many of the current top ten highest-grossing titles are older than Free Fire. Pokemon Go launched in 2016, Honor of Kings in 2015, and Candy Crush in 2012.
Even more ancient franchises like League of Legends, which first debuted in 2009, have demonstrated an ability to continue priming the pump through new releases. Its recent “Wild Rift” iteration racked up $505 million in its first 16 months of operations.
Though Free Fire may not be able to deliver the cash it once could – at least for now – it is still pulling in considerable revenue. Moreover, though QAUs did fall on a yearly basis, they remained relatively stable relative to recent quarters, even showing a slight uptick. If Garena can keep the title fresh through reboots and tweaks, hold fairly steady on QAUs, and arrest the departure of paying users, its next few years may be more of a soft fade than a sharp fall.
At a high level, Shopee is thriving. It is the undoubted market leader in Southeast Asia, with one source suggesting it has about 50% market share in those countries. Gross orders grew 42% YoY, while gross merchandise value (GMV) increased by approximately 30%. These figures show that Shopee seems to have effectively encouraged customers to make increasingly frequent orders, in line with its broader strategy.
Shopee has also successfully grown its take rate from 6.1% to 7.7% over the last year. This continues the company’s broader tactic of taking 0% fees to amass share and slowly ratcheting up once consumers are locked in. Sea’s control over unit economics is also tightening, with losses per order improving from $0.41 to $0.33 on an adjusted EBITDA basis which takes out the cost of running Sea’s regional headquarters. Per order loss was less than $0.01 in mature markets like Southeast Asia and Taiwan. Sea is turning the screw.
Not all is quite so rosy, however. Shopee has conducted multiple rounds of layoffs and retreated from several markets. After Free Fire was booted, Shopee proactively pulled out of India. The unit closed most offices in Chile, Colombia, Mexico, France, and Spain. Sea hopes to partially serve the Latin American countries from its Brazilian hub.
Though Shopee continued to grow and exhibited somewhat better control over its finances, it nevertheless recorded a greater decline on an adjusted EBITDA basis, logging a loss of $648.1 million; a year earlier, the loss was $580 million.
Given what we have heard about Garena and Shopee, it will not surprise the reader that Sea’s overall adjusted EBITDA fell precipitously compared to a year earlier. In 2Q21, the shortfall was just $24.1 million, greatly helped by Garena’s formidable revenue. With that diminished, Sea’s losses swelled to $506.3 million.
One can begin to see the fragility of Sea in these figures. For now, at least, the company’s economic viability rests largely on a single battle royale game. When it does well, Shopee’s spending is covered, and the machine sings. When it flails, Sea seems almost precarious, a stack of loss-making business units resting on the shoulders of a drooping Atlas.
If Sea’s adjusted EBITDA invokes brittleness, its balance sheet shows management’s finesse. Despite its losses, the company has nearly $6.5 billion in cash, thanks to a convertible bond sale in September 2021. With Sea’s stock nearing its peak, Forrest Li pulled in $6 billion, giving the company the leeway to stomach choppier waters. It was a masterful move that buys Sea time to reorient itself.
A recent letter from Li to his staff outlined where Shopee is headed in the near-to-medium-term:
Our number one objective for the next 12-18 months is achieving self-sufficiency. This means achieving positive cash flow as soon as we can. Right now, thanks to years of prudent action and hard work, we have a solid cash base that puts us in a safer position than many of our counterparts in the tech sector. However, we can easily run through this cash base if we are not careful, and with investors fleeing for 'safe haven' investments, we do not anticipate being able to raise funds in the market.
To achieve this goal, Li listed two changes: cost-cutting and instilling a “cost-sensitive culture,” across the organization. No more business class flights, lavish meals, or swanky hotels. Even leadership will sit in coach and stay in accommodation valued at no more than $150 per night. Until “self-sufficiency” is reached, Li and the rest of the executive team have pledged to forgo a salary.
Li's missive gets the point across as a message to both employees and the broader market. Sea will no longer tolerate a high-cost base nor allow itself to burn through money on the balance sheet aimlessly. However, Sea cannot afford to go into pure defense mode. To reach its full potential, it must smartly balance caution with continued investment, working through the chicanes of a complex market.
Sea has one of the highest ceilings in the corporate world. It runs three growing business lines across regional markets with scaling spending power. Extraordinary events or extreme patience are required for Sea to join the trillionaire’s club of Amazon and Apple. Still, it does not seem impossible to believe it could improve 10-20x from here, eclipsing its last high. Adherents may reasonably argue that Sea has venture capital upside, despite already doing $10 billion in revenue a year.
For that to feel like more than idle fantasy, Sea has much work to do. Six items should be at the top of its checklist:
Fight for Brazil
Lean on logistics
Keep Tencent content
Protect Chris Feng
Increase LTV with SeaMoney
Find the next Free Fire
In times of crisis, it is tempting to overreact. As its stock has tumbled, Sea has fled many promising markets, especially in Latin America. Amidst these departures, it’s tempting to think Sea should shutter the experiment for good, focusing the entirety of its resources on Southeast Asia. One source, who believes in Shopee’s Brazilian business, admitted that the market wants consolidation. “If Sea closed down Brazil, the stock would go up 20%,” they conceded.
Succumbing to market pressure would be a mistake. Brazil represents 30% of Latin America’s e-commerce market, with revenue of $49 billion. By 2025, that figure is expected to increase to $86.5 billion, a 15.8% CAGR. The country also has a highly dynamic fintech market; while 34 million Brazilians remain unbanked, the population is adopting digital payments at a historic pace. Critically, staying in the country allows Sea to maintain a regional presence, shipping across borders to Colombia and Argentina, for example. If and when fortunes change, that optionality could be valuable, giving Sea a chance to push its areas of operation outward.
Sea will not want to miss out on the opportunity to capture the torrid growth of the Brazilian market nor lose optionality. Succeeding will not be easy, though. Both Mercado Libre and Nubank are formidable, innovative competitors. While Shopee’s focus on low-cost items has likely grown e-commerce spending, it inevitably rubs shoulders with these businesses.
Those that oppose Sea’s involvement in Brazil will point to the poor unit economics. On an adjusted EBITDA basis, the company lost $1.42 per order in the country, more than 4x it's average. However, there’s reason to believe that Sea understands how to manage the transition from unprofitable demand aggregation to break-even. As mentioned earlier, Shopee loses less than $0.01 in Southeast Asia on this adjusted basis. In Brazil, losses are trending in the right direction, with current figures a 33% improvement YoY. Sea will believe it can shepherd this unit to eventual profitability.
Leaning into logistics is critical to this transformation. Sea was slow to invest in building these capabilities compared to competitors. Though its Shopee Xpress service launched in 2018, it only came to the fore in 2020. Sea’s timing makes sense – while trying to aggregate as much share as possible, it may have concluded money was better spent on discounts and advertising than logistics infrastructure. As it looks at its bottom line more carefully, the importance of reliable, low-cost delivery is becoming increasingly apparent.
According to one source, Sea has shown an ability to build competent in-house logistics. In Indonesia, a notoriously difficult place to deliver goods, Sea has rolled out Xpress services and slowly transitioned from third-party providers. Not only does this improve per order economics, but it’s also essential to providing a good consumer experience, driving delivery times down from weeks to days. Sea will believe it can continue improving these capabilities in Southeast Asia and undertake a similar mission in Brazil. Mercado Libre boasts impressive logistical strength; Sea must close the gap to provide similar service levels.
Naturally, 3PLs will be critical, too. Sea has a close relationship with logistics company J&T, an Indonesian player that has recently developed a presence in Brazil. J&T has ramped up that office to roughly 1,500 employees in two years, suggesting it sees the market as crucial. As long as Shopee continues growing order volumes, it will have the leverage to compress partner pricing.
Logistical brawn also provides some protection against insurgents. Just as Sea took its time to invest in this capability, newcomers are likely to do the same, putting their services at a disadvantage. In particular, Forrest Li will want to keep an eye on TikTok Shop. The Chinese company’s e-commerce effort met headwinds in the U.K., stalling an intended U.S. expansion, but it is thriving in Asia. Sister app Douyin has sold more than 10 billion products in the Chinese market, reaching a GMV of $78 billion. Meanwhile, TikTok Shop is attracting strong interest in Vietnam and is live across Southeast Asia.
While every e-commerce player will look at TikTok Shop with a wary eye, it feels particularly threatening to Sea. It is the ultimate attention-trap with a lucrative existing line of business that is best served to sell low-cost items in beauty and fashion. Business fantasists might enjoy thinking about what the two companies might look like combined: a chimera of games, social media, money, and commerce. (Unlike gaming and e-commerce, there are obvious synergies between gaming and social media.)
While Shopee is an area of opportunity, Sea will want to ensure it safeguards Garena, too. The division currently has strong downside protection thanks to its relationship with Tencent. Even if Free Fire continues to decline, Garena at least has regional publishing rights for the Chinese conglomerate’s collection of franchises, including Arena of Valor, League of Legends, and Speed Drifters. Right?
It’s not quite so simple. The agreement Tencent and Sea signed in 2018 lasts five years, expiring in 2023. Given the partnership’s success, it’s likely to be extended – but it’s not a sure thing. One source spoke of “tension” between the two companies, catalyzed by Garena’s creation of Free Fire, with Tencent reasonably wondering whether a developer of games will also be a fair broker when it comes to publishing. Earlier this year, Tencent sold a $3 billion stake in Sea, perhaps indicating a chill had set into the relationship.
Sea must make sure it protects this partnership. While it cannot stop developing its own games, it should try and placate Tencent, bring them back onside, and lock in another extended exclusivity agreement. This is a defensive rather than offensive maneuver. Firstly, failing to win publishing rights opens the door for another player to step in. Perhaps more importantly, it would break Sea’s narrative. While most of Garena’s earnings come from Free Fire, the sense that it has reliable, diversified publishing revenue offers a semblance of stability. Its role as the de-facto distribution partner for the region is also vital to its positioning. If Sea were to lose this grip at the same time as Free Fire showed weakness, it would start to look much less attractive: a one-hit wonder with a waning publishing business and unprofitable e-commerce arm.
From a cultural perspective, Sea operates more similarly to Chinese tech companies than Western ones. It has a strong, top-down culture with leadership heavily involved in day-to-day decision-making. Looking at Sea’s results, that approach seems to have worked. Several sources pointed to the firm’s intensive work ethic and execution ability as important strengths.
While Sea will not want to lose this ferocity, it may need to be better balanced in some cases. Specifically, it must protect Chris Feng, the organization’s president. The fact that Feng has been given this mantle despite not being a founder is a testament to his importance. Before taking on his latest title, Feng served as CEO of Shopee and leader of SeaMoney. He will retain responsibility over both departments as president.
Feng’s handling of Shopee has been particularly eye-catching. He oversaw its rapid global growth, driving it forward with formidable intensity and effort. “Shopee is all Chris,” one source said.
There are indications that Feng’s infamous stamina may be running thin. One source said Feng is hospitalized annually from overwork. Because of Feng’s importance and fatigue, one individual felt the company had a degree of “key man risk.” Sea will need to make sure it does not burn Feng out. It may also need to decentralize power across the organization to reduce such risks going forward.
Beyond improving Shopee’s economics, one of Feng’s key remits should be to grow customer LTV via SeaMoney. The division is growing speedily, extending revenue by 214% YoY; last quarter, it pulled in $279 million.
SeaMoney should look to accelerate this trajectory by building out new, lucrative product lines. The low penetration of traditional banking services in Sea’s markets gives the division a huge opportunity to become the region’s de-facto institution – Southeast Asia’s version of Ant Financial.
Sea seems awake to the opportunity. The company purchased Indonesia’s Bank BKE in 2021, improving its ability to offer financial services in the country. A few months earlier, it had received a digital banking license from The Monetary Authority of Singapore. Perhaps the only downside of the arrangement is that it requires Sea to maintain approximately $1.1 billion in capital on its balance sheet, limiting investments.
It is worth that inconvenience. In the coming years, Sea should follow the strategy of other financial super-apps, using a high-frequency relationship to layer on lucrative business lines, including savings, investing, and insurance. Indeed, it is considering the purchase of an Indonesian insurance company to undertake such a strategy.
If I were Forrest Li or Chris Feng, the checklist’s final item would annoy me most: find the next Free Fire. One may as well say, “create another money-printing machine.” Minting a winning game is at least as much art as science, and success can never be guaranteed. What should be expected of Sea is that it will act almost unreasonably in trying to bring such fruits to bear. The prize is too large, too transformative to do anything less.
First, Sea must continue to seed internal development. The company reportedly rolls out approximately three to four games per year. Many may not be publicly announced, launched via subsidiary studios – those that thrive are eventually claimed. It seems reasonable to suggest that this number could be significantly increased, giving Sea more shots at a breakout title.
Second, Sea should step up minority and majority investing in gaming companies. In 2020, Garena purchased Phoenix Labs, the Canadian studio behind Dauntless, for a reported $150 million. The conglomerate has invested in startups like Forte Games, Double Loop, PopScreen Games, Refract, and UnusuAll. Sea can afford to be much more aggressive here. It should aim to place small checks into as many promising gaming startups as possible, giving it visibility into traction and industry trends. Those with fast-growing franchises or exceptional teams can be folded into Garena, increasing the talent base and diversity of titles. If Tencent is the best acquirer of large game studios, Sea should try to establish itself as the natural destination for less mature businesses.
Finally, Sea should try to discover how to rationalize the gaming business. Though a fuzzy art, companies like Scopely seem to have found a predictable pattern. The publisher helps smaller developers achieve mainstream success, with four of its titles in a row reaching the number one spot for free-to-play games. None of the games Scopely has published are especially complex (though several riff on established IP).
If Sea can figure this out, “all bets are off,” as one source said. The business changes if it can get Garena’s money mill spinning at an even faster RPM. Suddenly, Sea can invest more aggressively in Shopee and SeaMoney, winning further share. It could also bulk up via valuable acquisitions.
Finding the next Free Fire shouldn’t stop Sea from investing in the current one. Garena has historically done an excellent job keeping the title fresh by dropping fresh skins, celebrity promotions, and special events. That has included turning Cristiano Ronaldo into a playable character and providing Ramadan-themed offerings.
It has also introduced new modes of gameplay, including “Lone Wolf” (one v. one) and “Clash Squad” (four v. four). The latter has taken off, becoming a popular way of consuming the game. Garena must continue iterating to keep players engaged and tempt back those that might have departed. Over a long enough time horizon, this can help establish Free Fire as a genuine classic and, hopefully, a franchise that can bear successive releases. Just as League of Legends can bank more than $500 million thirteen years after its debut by dropping a new version, Free Fire may one day be able to do the same.
Brazilian Formula One driver Ayrton Senna starts in pole position. In this case, it's a disadvantage. The right side of the Suzuki Circuit, where Senna sits in his McClaren, is rougher, meaning that Alain Prost, in second place, has the cleaner path. Before the race, Senna requested to move the pole position to the left-hand side of the track, to no avail.
Within a second of the light turning green, Prost is away. His Ferrari eats up the smooth part of the track and leaps into the lead. Senna is not about to give up his position so easily, though. He knows that Suzuki is a challenging track with few places to pass. Cede pole once, and you might not see it again.
Senna takes a hard inside line at the first corner, trying to squeeze himself between Prost’s Ferrari and the track’s edge, but Prost doesn’t budge, and in an instant, the two cars have hit, and they skid across the tarmac and into the dirt. A cloud of dust hangs over them as the men climb out of their battered cars. Their race is over.
After the race, Senna sits down for an interview with retired legend Jackie Stewart. The Scotsman asks Senna what he thought of the fact that in the past few years of racing, he had crashed more than every other world champion combined. Senna replies:
I find it amazing for you to make such a question Stewart, because you are very experienced, and you know a lot about racing. And you should know that by being a racing driver, you are under risks all the time. By being a racing driver means you are racing with other people. And if you no longer go for a gap that exists, you're no longer a racing driver.
Senna’s words are apt when thinking about Sea Limited. The Singaporean conglomerate thrives on seeing the gap and bursting through. It is a skilled driver, knowing when to seize the moment and capture opportunities in game development, e-commerce, and fintech. In its striving, Sea can find itself close to the edge, and sometimes, it may spin out in a cloud of dust and smoke. There will be more quarters like Sea’s last where the machine collides with reality, with the market, with itself. But if it no longer goes for the gap that exists, it would no longer be Sea.
The Generalist’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research and consult advisors on these subjects. Our work may feature entities in which Generalist Capital, LLC or the author has invested.