One of the best-performing technology companies over the last decade is Amazon (NASDAQ: AMZN). Over the past 10 years, Amazon's share price went up more than 20-fold to reach a market capitalization of $1.6 trillion, thanks to the growth of its e-commerce and cloud computing businesses.
In the coming decade, it's not hard to imagine that Amazon would solidify its leadership in e-commerce and cloud computing segments, and also expand its newer businesses such as advertising and groceries. Yet, given its already huge market capitalization, it's unrealistic to expect Amazon's stock price to sustain the past decade's price trajectory for the next 10 years as well.
If you are looking for comparable stock performance, there are younger companies that have the potential to deliver better stock returns than Amazon by 2030. One of them is Sea Limited (NYSE: SE).
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A rising giant with an admirable track record
Founded in Singapore in 2009 as an online gaming company, Sea Limited has since ventured into new business segments, notably e-commerce (Shopee) in 2015 and digital finance (Sea Money) in 2019. Historically, it operates across seven countries in Southeast Asia including Indonesia, Vietnam, Thailand, the Philippines, Malaysia, Singapore, and Taiwan. More recently, it has entered the Latin America and India markets. Its business expansion reflects favorably on its financials: Revenue rose by more than 700% to $2.2 billion between 2015 and 2019.
Many factors contributed toward Sea Limited's rapid rise to become a leading technology company in Asia. Notably, the company's incessant focus on localization has given it an enormous advantage over its peers. For example, Garena curates its games according to taste and also offer those games in local languages to its customers. Similarly, Shopee tailored its app -- in terms of language and product choices -- to address customers' different needs. Sea hires locals to lead its businesses, which results not only in a better understanding of customers in those markets but also a more effective and timely execution of business plans. For instance, Sea launched Shopee App in 2015 across seven markets simultaneously, in seven different versions (and languages), which is a testament to the soundness of its localization strategy.
The other important reason for Sea Limited's strong performance is the support of Tencent Holdings (OTC: TCEHY), both as a shareholder (25.6% share ownership) and partner. The relationship has benefited Sea in numerous ways, which include easy access to financial resources and management know-how, as well as a right of first refusal to publish Tencent's mobile and PC games in certain regions. This arrangement helped Sea become the largest gaming company in its operating regions (as measured by revenue) in 2019.
Though Sea's proven track record does not guarantee future success, it does assure investors that management knows what it's doing. Perhaps even more important is that it helps investors sit tight during tough times -- such as the recent COVID-19 market crash -- to benefit from Sea's long-term growth (more on this later).
Growth opportunities for the next decade
A solid track record ties in nicely with Sea Limited's long-term growth opportunities, and there are plenty of them.
To start with, Garena could grow its revenue for the foreseeable future thanks to its huge user base of 500 million quarterly active users (QAUs), and a low percentage of paying users of only 10% of QAUs (up from 8.4% in the same period last year). It is worth mentioning that Garena is actively growing its user base in newer markets like Latin America and India, which could further increase its already significant QAUs. Moreover, its average revenue per user of $1.40 remained low and could increase over time on the back of strong user engagement in existing games (such as Free Fire), as well as from future game launches. The latter will continue to benefit from Sea Limited's partnership with Tencent.
Similarly, Shopee is in a favorable position to grow at even higher rates than Garena, thanks to its market-leading position. Shopee is ranked No. 1 in terms of app downloads in the shopping category in Southeast Asia, and in the top three worldwide. As a market leader, Shopee benefits from network effects, in which an additional user or seller will add value to all the existing parties in its marketplace. If it can sustain this growth momentum, Shopee has a good shot at becoming the de facto marketplace in these markets. To this end, Shopee is investing heavily to sustain the growth of its sellers and customers, and it remains unprofitable since its inception. One thing to keep in mind, however, is that these investments could last for many years as Shopee tries to cement its leadership. Thus, investors are better off not having any expectations of a quick turnaround. Fortunately, Garena is already a profitable business and would serve as the cash register for Sea Limited's further investments in Shopee.
Also, it's worth mentioning that though Sea's digital finance arm, Sea Money, is still in an early stage of its development, it could quickly expand by leveraging on its sister companies. For example, Sea Money has been integrating its mobile wallet with Shopee, which results in a massive increase in usage. In July, Sea's mobile wallet accounted for 45% of Shopee's gross orders paid in Indonesia. The usage of Sea Money's services could grow even further as it deepens the integration with Garena and Shopee, and should serve as the next leg of Sea's growth.
Is Sea a buy now?
Alphabet subsidiary Google, in a joint report produced with Temasek and Bain, predicted that Southeast Asia's internet economy would triple by 2025, up from $100 billion in 2019. As the leading technology in this region, Sea Limited is nicely positioned to benefit from this tailwind.
One downside to investing in Sea right now is its high valuation. After surging by a monstrous 500%, the company's stock is currently trading at around 36 times 2019 revenue, a high price tag even if you consider all the positive factors mentioned above.
Hence, investing in Sea Limited at its current high valuation is dangerous, especially for investors who have a short investment horizon. But for those who are willing to hold on to the stock for the long term (more than five years), Sea might still be a reasonable buy given its stupendous growth prospects. For perspective, Sea doubled its first-half 2020 revenue to $1.6 billion.
With a market capitalization close to $80 billion, Sea Limited is already a massive company. Still, it will likely be worth much more a decade from now.
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