Story Stocks^®

Sea Limited (SE +7%) is making waves today after delivering another sizeable revenue beat on improving profitability in Q4. The e-commerce, gaming, and financial services giant in Southeast Asia has consistently taken the right actions to enhance the profitability of Shopee (its e-commerce division) and boost Free Fire users (its gaming division), all while steadily fortifying its financial services offerings, which acts as a significant contributor to the company's top and bottom-lines each quarter.

• In Q4, Shopee's gross orders jumped by 20% yr/yr to $3.0 bln, with gross merchandise volume (GMV) expanding at a quicker rate to $28.6 bln. E-commerce adjusted EBITDA was $152 mln in Q4, reversing a $(225) mln loss in the year-ago quarter. Livestreaming contributed roughly 15% of Shopee's order volume. Management mentioned that improving live streaming unit economics will enhance Shopee's profitability this year.
  • Live shopping streams have been a staple in China, with e-commerce titan Pinduoduo (PDD) being a leader in this space after disrupting the industry and forcing established giants like JD.com (JD) and Alibaba (BABA) to come up with similar offerings. With the success in China, companies have been bringing it to other countries, such as Bytedance's TikTok Shop.
• Digital Financial Services ended FY24 with revenue 30% higher yr/yr and adjusted EBITDA of over $700 mln. During Q4, SE delivered loan book growth above 60%, surpassing $5.0 bln and making it one of Southeast Asia's largest consumer lending businesses. Notably, SE added around 4 mln first-time borrowers without increasing its risk exposure as its 90-day nonperforming loan ratio (percentage of nonperforming loans versus total loans) remained stable at 1.2%.
• In Digital Entertainment, Free Fire's comeback in 2024 supported a 19% uptick in bookings and a 33% jump in adjusted EBITDA to $290 mln. SE attributed the Free Fire rebound to its user engagement tactics, prioritizing accessibility as the game remains a lightweight title that can run smoothly on numerous devices. Given that the game is played in over 160 markets, where hardware can vary drastically, accessibility remains central to long-term growth.
• SE is optimistic about 2025. The company anticipates growth across the board this year, projecting Shopee's GMV growth to be around 20% while still delivering improving profitability. In Digital Financial Services, SE expects its loan book to grow meaningfully faster than Shopee's GMV growth. In Digital Entertainment, SE will continue scaling its user base and broadening its content, underpinning an expected double-digit yr/yr jump in bookings and users.

SE's solid Q4 performance reflects management's emphasis on profitable growth. In late 2023, investors were dismayed by SE's decision to pivot to growth after outlining profitability plans just a few quarters earlier. SE noted that shifting focus back to expanding its top-line was imperative to stave off competitive pressures. Following a few months of volatility, SE quickly showcased that it had made the right decision. We noted in November that SE was poised for further upside; we continue to like the company's direction despite potential economic volatility over the near term.