Imagine this: 725 million users are playing games right now on one of Asia’s biggest gaming platform — Garena.
Mobile gaming is big business. It isn’t just for kids anymore.
By 2025, mobile gaming in Asia is set to hit US$100 billion.
Garena is owned by a little-known Singapore company called SEA Ltd (NYSE:SE). Listed in the New York Stock Exchange in 2017, SEA Ltd is one of the most valuable internet companies — a market cap of US$200 billion.
SEA Ltd was founded by Mr. Forrest Li 12 years ago, a Chinese-born Singapore businessman.
#1: SEA’s Money-Making Machine — Garena
In 2017, Garena created their first game — Free Fire — and reached over 1 billion downloads on the Google Play store. This is the most played mobile online game in Southeast Asia and Latin America.
There’s even a global competition called Free Fire World Series 2021 — where over 5 million viewers watch gamers thrash it out online.
You cannot ignore the fact mobile gaming has become a huge part of our lives. I’d even consider it “habit-forming”.
Now, how SEA Ltd makes money is simple: get users to buy “in-game” virtual items.
Last year, SEA Ltd sold over US$2 billion worth of “in-game” items. The top gaming company produced an extremely thick operating margin of 50%.
And it gets better. During its latest quarterly results, operating margins improved to 58%. And revenues from Sea Ltd’s Garena grew 167% to US$1 billion during the latest quarter.
The thing is, blockbuster games like Free Fire has a long shelf-life. This gives SEA Ltd a huge runway to make as much money from its users.
The more users play on Garena platform, the higher the chance users will buy more “in-game” items.
Since COVID started, SEA Ltd’s shares have rallied more than 863% since March 2020. This makes SEA Ltd one of the fastest growing stocks today.

Source: ShareInvestor Webpro, Dividend Titan
But selling virtual items is not the reason why SEA Ltd’s shares climbed so fast.
#2 SEA’s Wildcard
Actually, SEA Ltd has quietly built one of the fastest e-commerce in South East Asia — Shopee.
Shopee started in 2015. Within 6 years, its online users grew from 1.7 million to a massive 752 million users. Shopee’s revenues jumped from US$17 million to US$1.7 billion.
Today, Shopee sells more products on its platform than any other e-commerce platform.
At first glance, you think Shopee is one of the fastest growing players with a huge online marketplace. But what’s important is the company is still struggling to make a single dollar of profits.



Source: SEA Ltd’s 2Q2021 Results
#3 SEA’s 2 Biggest Problems
First, “network effect”.
Network effect happens when an increasing userbase helps improve the value of an online platform. This attracts sellers to the platform. And Shopee makes more money collecting fees from sellers this way.
Network effect is a competitive advantage.
But competitive advantage takes time to develop. Some companies develop faster, some companies develop slower. Alibaba was profitable within three years after its founding.
Internet businesses dominate only if they achieve network effect. Shopee tries to achieve it by giving huge discounts to attract users to their platform. Yet Shopee losses keeps getting bigger.
The second problem is higher operating costs.
Of the 2 problems, operating costs is the more crucial one.
Shopee needs to wrestle with higher marketing and logistics costs in South East Asia. Consumer habits are different across island countries, and you cannot simply move your products by truck. You need to spend more on sea and air travel to deliver these products.
That’s why sales and marketing costs keep increasing.



Source: SEA Ltd’s Annual Report 2020, Dividend Titan
Shopee is in a much tougher position because of competition — Tokopedia, Lazada.
It’s going to take time for Shopee to develop its network effect. Until then, it’s going to continue burning more cash before it starts seeing results.
You see, e-commerce is a fast growing industry. But it’s hard which platforms will truly survive.
The auto industry was an emerging technology in the early 1900s. There were over 2,000 auto companies then. In just 50 years, only three big auto companies were dominating the entire U.S. market.
If Shopee can pull through and dominate South East Asia, it’s going to be a “winner-takes-all” for SEA Ltd.
Amazon took 10 years before it’s profitable. Then eventually dominated the online retail market.
SEA Ltd’s money machine is still its mobile gaming operator Garena. But Shopee is a wildcard. If the company can pull its e-commerce off, shares are going to fly even higher.
Sometimes investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
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Excellent analysis of what is under the hood! 🙂
Hi Eng,
Thank you for the kind words!
Willie