The Generalist - Sea is Operating at the Edge

Friends,

It’s the perfect moment to dive into a company I’ve wanted to study for a long time: Sea Limited.

The Singapore-based business is fascinating. Not only does it own one of the highest-grossing mobile games in the world, Free Fire, but it also operates a massive e-commerce arm that has shaken up the status quo in Southeast Asia and Latin America.

The way in which Sea leverages Free Fire’s free cash flow to fund its online shopping expansion has earned comparisons to AWS’s role in Amazon’s corporate machine. This playbook helped Sea hit a peak valuation of more than $202 billion last year.

A lot has changed since then. Sea’s valuation has tumbled, and the company is transitioning from a high-burn hyper-growth business into one focused on profitability. It makes it an especially intriguing time for a case study.

To learn about Sea’s tricky relationship with Tencent, improving unit economics, and its massive fintech opportunity, jump in below:

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Sea is Operating at the Edge

Actionable insights

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.

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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 on other sides of 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 is 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 on 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.​
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In a meme

​​​​For the pictorially inclined, here's the whole piece — all 7,000 words of it — in a single meme.

Puzzler

​​​All guesses are welcome and clues are given to anyone that would like one. Just respond to this email for a hint.

Julia D speedily solved the wordplay at the heart of our last riddle. She was joined by Ahmed M, Jesse O, Joshua F, Vanish T, Parag D, Karunwi S, Nnamdi E, Sharon C, and Jong-Chan C. All deciphered this puzzler:

The answer? Empty. Well played to all.

Wishing you all a lovely rest of the day wherever you are in the world.
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Until next time,

Mario