Is Sea Ltd The Next MercadoLibre?

This relatively unknown company has returned more than 500% since its IPO in 2017, but who are they, and why have they drawn comparisons to MercadoLibre?

Sea Ltd‘s (NYSE: SE) name is derived from the geographical location it calls “home”: the seven markets of Southeast Asia and Taiwan. Sea’s mission is “…to better the lives of the consumers and small businesses in our region with technology.” Sea Ltd operates through a number of divisions, Garena in digital entertainment, Shopee in e-commerce, and SeaMoney in digital financial services and is a market leader in the territory. It is also backed by Chinese giant Tencent which owns a considerable stake.

What’s the similarity?

Sea Ltd’s e-commerce and financial services divisions are similar to MercadoLibre’s (NASDAQ: MELI) core business e-commerce and financial division MercadoPago. Both companies operate in markets where there is an emerging middle class and increasing numbers using the internet. Both Southeast Asia and Latin America have approximately the same populations, with over 585 million people and 605 million people respectively. Nearly ten years ago, only 20% of people in Southeast Asia had internet connectivity compared to over 60% today and is the fastest-growing internet economy globally.

Sea Ltd Financials

Sea Ltd’s revenue increased by 57.9% year-over-year to $914 million for Q1 of 2020. However, it is still unprofitable, reporting an adjusted loss of $239 million. Sea Ltd’s divisions have a limited operating history with the SeaMoney and Shopee platforms launching in 2014 and 2015 respectively, but have grown substantially.

Shopee is the leading e-commerce solution in Southeast Asia by gross merchandise volume with the closest competitor being Alibaba‘s (NYSE: BABA) Lazada. Gross merchandise volume grew by 74.3% in Q1 to $6.2 billion dollars and was accelerated by COVID-19. The number of buyers and sellers increasing on the platform strengthens the network effect and makes it an obvious choice for shoppers in the region.

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The importance of payments

Similar to MercadoLibre, Sea Ltd developed a payment system which it has integrated with its e-commerce business, also similar to both Amazon (NASDAQ: AMZN) and Shopify (NYSE: SHOP). Sea Ltd operates in a region where many don’t have credit cards, and credit card payments are falling behind e-payments. Total payment volume crossed the $1 billion mark for the first time, roughly a year after integrating it with the Shopee platform. Total paying users amounted to 10 million people in the last quarter. In comparison, MercadoLibre’s total payment volume was $8.1 billion, which means there is potentially a large runway left for Sea Ltd due to the similarities in population and emerging economies.

Sea Ltd’s unexpected Golden Goose

Sea’s gaming division Garena (short for “gaming arena”) has been on fire and is the region’s largest digital entertainment company by revenue, increasing 30% year-over-year to $512.4 million. The digital entertainment segment makes up over half of Sea Ltd revenue with its game “Free Fire” hitting 80 million daily active users.

“Free Fire” was the highest-grossing mobile game in Latin America and Southeast Asia for Q1 2020. This has been helped by internet users in the region, with 90% connecting to the web using mobile phones. This division has benefited the company significantly, but it comes with risk due to the nature of the gaming industry which is dependent on consistently producing hit titles. The high percentage of Sea Ltd’s revenue that comes from this segment is worth keeping an eye on as it diversifies away from the core gaming business.

Another encouraging sign for Sea Ltd, along with the market opportunity, is that it is run by Chairman and CEO Forest Li, who owns a considerable stake in the business, meaning that his interests are aligned with that of shareholders.

So, will Sea Ltd be the next MercadoLibre? 

It is simply too early to tell, but there are encouraging signs for investors due to the market opportunity in Southeast Asia which appears similar to that of MercadoLibre in Latin America. COVID-19 has undoubtedly helped Sea’s business but is likely to have been an acceleration of a trend rather than a short-term tailwind, and all three divisions have benefitted. Li has described this shift to digital as “irreversible” and Sea Ltd should benefit greatly in the years to come provided it can execute and beat off competition from competitors such as Alibaba.

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