Before Sea Limited (NYSE:SE) moved into e-commerce, it was an online gaming company called Garena. On paper, the profits from its gaming division funds its growth in e-commerce, but in reality, it’s more complicated than that. On a Fool Live episode recorded on June 16, Fool contributors Toby Bordelon and Brian Stoffel discuss the company’s moves into Latin America, the challenge of juggling three growing business segments, and what investors should be watching.
Brian Stoffel: I’m going to start with Sea Limited, the ticker symbol’s, SE. This is a Southeast Asian company, in fact, that’s what Sea stands for, South East Asia. They have three businesses. One is gaming, one is e-commerce, one is the payment tool. I’m focusing on the e-commerce, which is also the most important one to me. The last time we met, we talked about their first-quarter earnings, which were great. But there’s two new stories that I want to come out with, and actually I’m going to go back.
One of them is gaming-related, and that is the popularity of their in-house game, which is Free Fire. At the recent Free Fire World Series, there was peak viewers of 5.4 million, that’s just a number, here’s the takeaway. It was the all-time most popular esports event ever. That’s like icing on the cake for my investment thesis, because my idea is the gaming is great, but you take all the money from gaming and you put it into commerce and the payment, because in the long term that’s what I think where the real moats and optionality are. But that’s great news.
Here’s the other part. There are rumors that Shopee is moving into Chile and Colombia. They’ve already reportedly moved into, not reportedly, they’ve confirmed moving into Brazil and Mexico. These decisions, they confuse me a little bit, because they say that these are asset-light decisions, and look e-commerce isn’t asset-light, like that’s ridiculous. Asset-light. That’s like asset-light space travel. I don’t buy it.
Now, these aren’t confirmed, but there are reports that they are moving into like I said, Chile and Colombia. This appeared in Reuters on June 9. Here’s the thing. It’s confusing, but also I’m not Forrest Li, the founder, and owner, and maybe he’s got data that I don’t have about this.
Toby Bordelon: Brian, we’ve talked about Sea Limited a couple of times on the show and you had me getting ready to buy, right, you were convincing me. Now you’ve got me thinking, I don’t know. Maybe I need to wait and see what happens with this movement into Chile and Colombia perhaps.
But what I want to think about here is that they’re very different businesses that you alluded to in the beginning. E-commerce and payments, I get how that works together easily. I mean, many companies do that, so fine. But gaming seems like a very different business. Now, it’s doing well, most popular event of all time, great. But can they focus on both of these very different businesses successfully as this is still a young company, still a growing company? Is management able to give both these segments each what they deserve and continue to grow both of them, or is that going to cause a distraction to their growth?
Stoffel: That’s a really good question. I think what it all comes down to is whether or not that they are segmented, and what I mean is that there is an e-commerce [segment] and they focus on the e-commerce, there’s gaming and they focus on gaming, and there’s not one person trying to make all the decisions for all of them.
I go back to talking about Berkshire Hathaway. Warren Buffett once talked about how See’s Candies does great, but they’re not going to expand and become this world dominator or anything. They generate all this excess capital. By being part of Berkshire Hathaway, they can take the capital of that and put it into something that needs the capital instead of chasing weird growth that doesn’t work out. Sea [Limited] can do the same thing if they do it right, where there’s more money coming out of gaming than they need. So you can go after purchasing stupid things, you can give it back to shareholders, you can buy back shares, you can let it sit in the bank, or you can put it into e-commerce. I do think that this can work together, but it needs to be done right.
Bordelon: What we’re really looking for here long-term is top management’s ability to allocate capital from its businesses.
Bordelon: Good. That’s something good to watch. Thank you.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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