The word "conglomerate" used to be reserved for behemoths like Procter & Gamble, the parent company of 65 different consumer brands producing everything from home care to baby care to hair care. Along comes the digital economy and a whole new class of brands and services are created. Companies like Amazon were able to show it's possible to assemble a collection of digital businesses to create an even larger organization in cyberspace. That colossal innovator is now valued at almost $1.1 trillion.
There's an up-and-coming company in the digital realm trying to be the next conglomerate and showing that more than one multi-focused company can succeed in this sector. Singapore-based Sea Limited (SE 3.52%) operates in digital entertainment, e-commerce, and digital payments, and it's growing at a rapid pace.
The current bear market has hit many tech and growth stocks hard and contributed to the 78% drop in Sea's share prices from all-time highs set last fall. It's also potentially created an opportunity for long-term investors.
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Diversity is the key to success
One-dimensional business models can attract plenty of success, but over the long term, they can hit a wall in terms of generating growth. Diversifying is the best way to stop a business from going stale because when one segment is struggling, there's a greater chance of another segment picking up the slack. Sea Limited's group of businesses is a good example of this.
Sea Limited started as an e-commerce operation that expanded to incorporate a digital entertainment segment. While it ramps up its e-commerce efforts, its Garena game development studio, launched the highly successful Free Fire battle royale mobile game that has been downloaded over 1 billion times since its inception. In 2019, pre-pandemic, the digital entertainment segment generated $1.8 billion in revenue, yet by the end of 2021 that had soared 138% to $4.3 billion. That revenue helped fuel growth for the entire company.
With pandemic-related lockdowns going away and society reopening, people are spending less time playing games. That's hurt gaming revenue. Sea took another partial hit when its flagship Free Fire game was banned in India (possibly only partially). Reports suggest existing players still have access, but new downloads are blocked and the company is seeking further details from the Indian government. These changes are part of the reason Sea Limited anticipates a drop in 2022 digital entertainment revenue to between $2.9 billion and $3.1 billion. This segment of the company is not contributing as much to the overall bottom line as it did in prior years.
That's where diversification comes into play. Sea Limited's e-commerce segment, driven by the Shopee app, is expected to grow by a whopping 71.8% in 2022. It's the company's largest business unit by revenue, generating $5.1 billion in sales for the 2021 full year, which is expected to jump to as high as $9.1 billion this year.
Shopee is a hybrid e-commerce app that facilitates consumer-to-consumer and business-to-consumer sales. In Q1 2022, it was the top-ranked shopping app by downloads globally, but it's truly dominant in Asian markets by other metrics. In the whole of Southeast Asia, Shopee ranked first by monthly active users, and in Taiwan specifically, it was the app shoppers spent the most time on.
Stronger together
For investors, it's the combined result that truly matters. Although gaming is expected to be a drag in 2022, if Shopee achieves the high end of Sea Limited's guidance, analysts think it'll be enough to lift the whole company to a revenue growth rate of 34%. Still, it's worth noting, that is a steep drop in the growth rate compared to 2021 where revenue jumped 127% from 2020. As Sea Limited's businesses mature and its revenue numbers grow larger, it'll be harder to log triple-digit percentage gains.
The company has come a long way in a very short time span, which is not only a testament to its excellent execution but also its focus on rapidly emerging economies across Asia.
In addition to its two key segments already mentioned, Sea Limited has a booming digital financial services business led by Sea Money. In Q1 2022, it contributed $236 million, which was only 8% of the company's overall revenue, but it grew an eye-popping 359% year over year. Therefore, it won't be long until it's making up a much larger portion of Sea Limited's results.
Buy the dip, and hold for the long term
If history is any indication, the bear market in the tech sector won't last forever. With Sea Limited stock down 78% from its all-time high, there's a potential opportunity to buy a transformative player in the digital economy at an enormous discount. Over the long term, the company could catch more than one wave of strong growth.
The global gaming industry was worth $198 billion in 2021 and that's expected to grow to $339 billion annually by 2027, according to Mordor Intelligence. But more importantly for Sea Limited, mobile has overtaken PC and console to make up the majority of the industry's value -- and Asia Pacific is expected to hold the largest market share in the long run.
Similarly, by 2024, the e-commerce industry in Asia could bring in up to $1.92 trillion in revenue, making up 61% of the global market and placing Sea Limited in the middle of the largest slice of the pie.
That's why, when looking back a decade from now, you might regret missing the chance to buy this dip in Sea Limited stock.
