Sea Limited’s Fate Depends on This One Mobile Game

Sea Restricted (NYSE:SE), an e-commerce and online game firm primarily based in Singapore, went public at $15 a share in late 2017. Its inventory value subsequently surged to about $230 per share, boosting its market cap to over $120 billion and making it Singapore’s most precious firm.

I used to be initially skeptical about Sea — it was deeply unprofitable, confronted intense competitors from Alibaba‘s (NYSE:BABA) Lazada, and its valuations have been frothy. However after monitoring Sea’s progress over the previous a number of quarters, I lastly began a place this January.

I turned bullish on Sea for 2 principal causes. First, its e-commerce platform Shopee greater than doubled its orders yr over yr within the first 9 months of 2020 and surpassed Lazada in complete downloads. Second, Sea’s adjusted EBITDA turned constructive over the previous two quarters as Shopee narrowed its losses per order whereas its gaming phase, Garena, raked in greater earnings to offset its e-commerce losses.

Picture supply: Garena.

Nonetheless, Garena’s progress spurt primarily comes from a single recreation, Free Hearth. Let’s look again at Free Hearth’s origins, the way it turned the core revenue engine of Sea’s sprawling enterprise, and whether or not or not the corporate’s dependence on a single hit recreation is sustainable.

The historical past of Free Hearth

When Sea went public, most of its cell video games have been licensed from different publishers. The licensing charges for these video games, which embody Tencent‘s (OTC:TCEHY) League of Legends and Enviornment of Valor, took a chew out of Garena’s income.

To cut back its dependence on third-party video games, Garena revealed Free Hearth, a battle royale recreation developed by the Vietnamese firm 111 Dots Studio, in late 2017. Just like different common battle royale video games, Free Hearth lets as much as 50 gamers parachute into an island enviornment to struggle one another.

Free Hearth hit over 100 million day by day gamers final August as folks performed extra video games all through the pandemic, and it remained the highest-grossing cell recreation in Southeast Asia and Latin America final quarter, in accordance with App Annie. The agency additionally ranked Free Hearth as the world’s most downloaded cell recreation final yr.

Garena's Free Fire.

Picture supply: Garena.

Free Hearth would not require a lot space for storing and runs nicely on low- to mid-range units, which makes it a preferred selection for avid gamers who cannot run higher-end battle royale video games like PUBG Cellular, Fortnite, or Name of Obligation: Cellular easily. It is also a common recreation for on-line esports tournaments. Final quarter, Sea famous that Free Hearth’s esports tournaments had collected greater than 150 million on-line views up to now.

The economics of Free Hearth

Free Hearth generates a big portion of Sea’s digital leisure income, which rose 80% yr over yr within the first 9 months of 2020 and accounted for 47% of the corporate’s high line.

That income progress is spectacular, however a better take a look at the digital leisure unit’s adjusted EBITDA — which offset Sea’s e-commerce and fintech losses over the previous two quarters — reveals simply how necessary Free Hearth is to Sea’s future:

Adjusted EBITDA (Million USD)

FY 2019

Q1 2020

Q2 2020

Q3 2020

Digital Leisure










Digital Finance Companies





Different Companies










Knowledge supply: Sea Restricted.

In different phrases, Free Hearth’s progress buys Shopee and its fee platform SeaMoney extra time to slender their steep losses. 

The way forward for Free Hearth

Maintaining avid gamers engaged in Free Hearth might sound difficult as the sport enters its fourth yr and the battle royale style matures. To counter that slowdown, Garena is testing out Free Hearth MAX, an enhanced model for higher-end units, throughout a number of markets. It is also always refreshing the sport with new options and rewards.

Wanting forward, Garena might nonetheless promote Free Hearth in new markets — akin to North America, Europe, or Northeast Asia — and even license it again to Tencent (which owns a big stake in Sea) for Chinese language avid gamers. In different phrases, there are nonetheless loads of methods for Garena to maintain Free Hearth’s flame alive.

The underside line

Sea Restricted is a promising progress inventory, nevertheless it’s deeply unprofitable by GAAP requirements and its constructive adjusted EBITDA is pinned to a single cell recreation. Free Hearth continues to be extremely common, however traders ought to maintain tabs on its progress to see if it might proceed to assist Sea’s unprofitable e-commerce and fintech divisions.


This text represents the opinion of the author, who could disagree with the “official” suggestion place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even considered one of our personal — helps us all assume critically about investing and make choices that assist us turn into smarter, happier, and richer.