Authored By Louis Stevens
Founded in 2009, Garena was the first line of business to be built within what is today the Sea Ltd. conglomerate, which now contains a variety of businesses, such as SeaMoney, Shopee, and Fulfillment by Shopee.
From 2009 to 2021, Garena experienced meteoric growth, which was supercharged by the success of its globally popular game Free Fire. Free Fire is a battle royale format game, akin to the very popular Fortnite. Garena skyrocketed from nothing in 2009 to one of the most popular gaming platforms on earth, on which 600M users today shop for new games, connect with friends, and engage with the gaming world broadly.
Notably, Garena is not just Free Fire. Free Fire is just one game, produced by Garena, on the Garena platform.
Image Of The Garena Platform Client (What You See When You Launch The Program On Your Computer)
The private markets and public markets understood the success and attractiveness of this gaming platform well, and Garena was seen as Sea's crown jewel from 2009 to January of 2022. In January of 2022, India banned Garena, and Garena lost 40M of its users, causing its sales to get cut in half within about a year. This added to the panic and negative narratives surrounding the business that still linger today, despite Garena returning to growth, as we will explore in a moment.
The central idea that I'd like to convey to you today is that Garena is still this crown jewel. It is still a free cash flow generative powerhouse of a business, and it has now returned to growth. To illustrate the idea that it is this, I wanted to use this brief today to formally share ideas I've been sharing on X and within the LAS community.
Garena's Ascension
I recently shared the two "macro" elements that slowed Sea's growth in 2022-2023. Both of these macro elements have returned to growth, and, expectedly, so has Sea. I believe this illustrates that Sea's growth issues have had much less (nothing so far) to do with competition and much more to do with factors outside of its control. Nevertheless, the prevailing market narrative continues to be that competition is hurting the company, despite it having more market share in SE Asia than MercadoLibre, Amazon, and Coupang do in their respective regions.
These above-mentioned macro elements affected Sea's Garena business and its Shopee business specifically, both of which have had troubles with their growth in recent years, which makes sense.
Because this brief is only about Garena, we'll focus on Garena in the following work.
As of today, Garena's macro issues have resolved themselves or are in the process of resolving themselves, and this has made me excited about the Garena business. To understand my excitement, we must consider the macro element that caused Garena's sales to decline. Garena's slowdown resulted from two factors:
1) India banned free fire in early 2022. India accounted for 40M Free Fire users, and Garena lost these users, which caused its Garena's sales to get cut in half, though Sea has been working to relaunch this line of business in India (latest language from mgmt below)
"The battle royale game had over 40 million of its 75 million globally monthly active users in India in January of 2022, according to analytics firm App Annie. In fact, 'Garena’s Free Fire: Illuminate' was the most popular app to be banned in India in February 2022."
2) Number of mobile gamers in SE Asia declined in 2022-2023 due to late re-openings of SE Asian economies, but has since returned to growth (chart below). I'm excited about Garena, arguably more than any other line of business for Sea currently, because it will generate about $1.2B in cash flow for the business this year (possibly more), and this should start growing sustainably at 10-20% (much more if Free Fire India gets unbanned) in the years ahead as mobile gamer growth resumes in SE Asia, where digital product adoption still remains at just 50-60% of the population (so huge runway for growth ahead).
SE Asia Mobile Gamer Count (Note Decline In 2022, Which Created The Perfect Storm For Slowing To Decining Garena Growth Along With The India Ban)
Statista
As of today, however, mobile gamer growth has resumed in SE Asia, and Garena growth in the region has also resumed, as the data below indicates.
Sea Ltd. Q1 2024 Investor Presentation
And, while Free Fire India has now been delayed by 10 months, it still could be relaunched, which would create a huge growth tailwind for Garena. Here's the latest on Free Fire India relaunch:
"For Free Fire relaunch in India, at this moment we are actively working with stakeholders, including the regulatory, the potential local partners to figure out what is the best plan to relaunch Free Fire in India. And, well, if that is successful, I think that will be a meaningful potential upside in terms of the users and the bookings considering India is a very, very big market. But just to clarify, at this moment, for our outlook for the rest of the year in terms of double-digit growth (of Garena, this is not taking into consideration the relaunch of India. So our current guidance is just based on the existing trend for Free Fire." - CEO Forrest Li, Q1'24 Sea Ltd. Earnings Call
Sea Ltd. Q1'24 Earnings Call
Garena's Current Active Users
Sea Ltd. Q1 2024 Investor Presentation
Garena's Current Bookings, Revenue, And Cash Flow Generation
Sea Ltd. Q1 2024 Investor Presentation
To close, I believe we've finally worked through all the difficulties associated with the Garena business, and, at 30x Garena's 2024 cash flows, we're looking at about $36B in enterprise value, which is about Sea's current enterprise value, which implies we're getting Shopee, Fulfillment by Shopee, and SeaMoney for free today, as top an $8.6B cash coard (that generates about $360M in cash flow per year) and overall free cash flow generation.
Disclosures:
L.A. Stevens has rated Sea Ltd. a "buy."
