Sea

Sea's second-quarter revenue and adjusted EBITDA increased 48% and 11%, respectively. Sea thinks that Shopee's adjusted EBITDA/GMV of 2%-3% is within reach. Monee's loan book rose 62%, versus EBIT growth of 15%, due to high sales and marketing expenses growth and provision.

Why it matters: The good second-quarter results and guidance reaffirm our long-term outlook for Sea. We agree with management's strategy to prioritize Monee's growth, given the headroom in Sea's underbanked markets. We think changes in product and country mix have led to higher Monee provision and lower margins. However, its underlying credit risk across products and user cohorts is stable. We have already assumed the segment's EBIT margin to decline by about 500 basis points in the coming decade. We have yet to bake in meaningful sales from new games, as Garena doesn't have a strong track record in launching successful titles other than Free Fire. Also, we expect Garena to prioritize user growth and engagement over monetization at the early stages of new game launches.

The bottom line: We maintain our fair value estimate for narrow-moat Sea Limited at $153 per share. The shares appear undervalued. We disagree with the market's concern about the firm's long-term margin recovery. Increasing take rate mainly driven by advertising, improving unit economics in logistics and fulfillment, VIP membership and content-driven e-commerce, and economies of scale will allow Shopee to meet our 2.6% adjusted EBITDA/GMV estimate in the midcycle.

Key stats: Content e-commerce continues to scale at Shopee. Livestreaming and short-video-driven e-commerce orders were up over 50% year on year, and content-driven orders accounted for 25% of Southeast Asia physical goods orders—a sizable share. Shopee's content unit economics improved sequentially and is now in line with the overall platform's. This leads us to believe that Sea is competitive in the content e-commerce space in Southeast Asia.

The VIP program drives GMV growth and user stickiness. VIP members contribute to 24% of Asia GMV with 80% retention. VIP members spend meaningfully more after subscribing.

Our fair value estimate is $152 per share, derived using a discounted cash flow model with a weighted average cost of capital of 11.5%. This represents 2025 enterprise value/EBITDA of 30 times. We assume total revenue and EBIT will grow at 16% and 24% CAGRs, respectively, in the coming decade.

Our 10-year GMV CAGR forecast is 13%. The monetization rate for Shopee is currently in the low teens, but we expect Sea to increase this to the midteens in the coming decade as volume scales up and the firm improves its advertising tools and logistics services. We expect Sea to grow along with rising income levels and increasing e-commerce penetration in its key markets, backed by improving delivery speed and logistics costs. We assume that Sea’s operating margin will increase to 15% by 2035 from 3.5% in 2025. We forecast EBITDA/GMV to reach 2.5% by the end of the decade, in line with management’s guidance of 2%-3% in the long term.

We project both Garena’s revenue and EBIT to grow at a CAGR of 3% in the coming decade. We have yet to assume any new hit games to replace Free Fire in our forecasts.

For the digital financial services business, Monee, we believe the growth drivers include rising adoption of SPayLater, an increase in offline cash loans, growing average loan size (as Monee accumulates the credit history of its users), and more varieties of credit use cases offline (such as for buying cellphones). As Monee accumulates experience in better managing its risks, expands its scale of operation, and increases the mix of businesses in lower-margin countries, we assume segment EBIT margin will drop to 21% by 2035 from 26% in 2025. We expect financial services revenue and EBIT to grow at a CAGR of 21% and 19%, respectively, in the next decade.

We assign a Narrow Morningstar Economic Moat Rating to Sea and its e-commerce operation (Shopee) with a network effect moat source, but a no-moat rating to the gaming business (Garena) and digital financial services business (Monee). Shopee generates positive adjusted EBITDA, and we expect its margins to increase in the coming years. Garena only has one key game, Free Fire, and we don’t see it demonstrating strong research and development ability to produce new hit games in the future. Monee doesn’t have a moat due to its relatively small scale.

A provider of third-party B2C marketplaces predominantly in Southeast Asia (Indonesia, Malaysia, Thailand, the Philippines, Vietnam, and Singapore), Taiwan, and Brazil, Shopee occasionally runs trial phases in other countries to determine expansion targets. Shopee accounted for 52% of the e-commerce market in Southeast Asia by GMV in 2024 and was the dominant leader in all Southeast Asian countries it operated in as per Momentum Works. In all Southeast Asian markets, its share was above 50%, with the exception of Indonesia with 46%.

As for network effect, the larger number of buyers on the Shopee platform will entice more merchants to join the platform, resulting in a higher number of categories and products offered and hence higher purchases from the buyers. This drives more merchants to join the network. In addition to the value added for each new participant in the platform, we see value added to the existing participants, as well. Existing consumers should benefit when new consumers join, make purchases, and generate product reviews. The addition of a new merchant also creates value by providing more product assortment and competition in price and services for the same type of products for the existing and new customers. Shopee also generates revenue through advertising, transaction-based fees, and others, and thus more participants on the platform will lead to greater monetization opportunities.

Sea’s gaming business, Garena, doesn’t have a moat, as we are not convinced that it has the R&D ability to produce popular gaming titles consistently in the coming decade. We are not confident that its largest franchise, Free Fire, can maintain the same or higher level of popularity and monetization consistently in the next 10 years. Garena’s absence of other self-developed titles with meaningful revenue contribution leads us to doubt if Garena can maintain its profit level if Free Fire loses popularity one day.

We don’t think Monee’s scale is large enough compared with its financial technology peers in Southeast Asia, so we don’t assign it a moat. Sea’s digital payment business provides a payment method for transactions on Shopee and offers short-term loans to consumers and merchants on the Shopee platform. It also has offline merchant touchpoints that support its e-wallet function. Monee’s digital wallet had 30 million users in Southeast Asia, according to GlobalData as of August 2023, with no update since then. Total payment value of ShopeePay was not disclosed. However, in 2024, Shopee’s GMV and game bookings only accounted for 9% of the payment value of the six Southeast Asian countries Sea operates in. Assuming Sea’s online services are the main use case of ShopeePay, the scale of ShopeePay is still relatively small.

Garena could develop other hit games that diversify its revenue stream in addition to Free Fire.

Sea could expand its profitability faster than expected due to reduced competition in the Southeast Asia e-commerce industry.

Monee's business and profitability could grow meaningfully if there are limited competitors and vast untapped opportunities in Southeast Asia.

Due to low switching costs, Sea may fail to achieve profitability because of increased sales and marketing spending needed to attract customers.

Free Fire could experience a rapid secular decline in bookings and users, while Garena could not release another hit game to replace Free Fire’s contribution.

Monee could face challenges in managing bad debt, as it is overstretched in its loan offerings.