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Sea Limited (NYSE: SE), an e-commerce and video game business based in Singapore, went public at $15 a share in late 2017. Its stock price subsequently rose to about $230 per share, increasing its market cap to over $120 billion and making it Singapore’s a lot of valuable company.

I was initially skeptical about Sea– it was deeply unprofitable, faced extreme competition from Alibaba’s (NYSE: BABA) Lazada, and its assessments were frothy. However after tracking Sea’s growth over the previous numerous quarters, I lastly started a position this January.

I turned bullish on Sea for 2 main factors. Initially, its e-commerce platform Shopee more than doubled its orders year over year in the very first 9 months of 2020 and surpassed Lazada in overall downloads. Second, Sea’s changed EBITDA turned positive over the previous two quarters as Shopee narrowed its losses per order while its gaming section, Garena, raked in greater earnings to offset its e-commerce losses.

However, Garena’s development spurt primarily comes from a single video game, Free Fire. Let’s look back at Free Fire’s origins, how it became the core earnings engine of Sea’s vast service, and whether the business’s reliance on a single hit video game is sustainable.

When Sea went public, most of its mobile games were certified from other publishers. The licensing fees for those games, which include Tencent’s (OTC: TCEHY) League of Legends and Arena of Valor, took a bite out of Garena’s income.

To minimize its reliance on third-party games, Garena released Free Fire, a battle royale game developed by the Vietnamese business 111 Dots Studio, in late 2017. Similar to other popular fight royale video games, Free Fire lets up to 50 players parachute into an island arena to eliminate each other.

Free Fire hit over 100 million day-to-day gamers last August as individuals played more video games throughout the pandemic, and it stayed the highest-grossing mobile video game in Southeast Asia and Latin America last quarter, according to App Annie. The firm likewise ranked Free Fire as the world’s most downloaded mobile game last year.

Free Fire does not need much storage area and runs well on low- to mid-range devices, which makes it a popular choice for gamers who can’t run higher-end fight royale video games like PUBG Mobile, Fortnite, or Call of Task: Mobile smoothly. It’s likewise a popular video game for online esports competitions. Last quarter, Sea kept in mind that Free Fire’s esports tournaments had accumulated more than 150 million online views to date.

Free Fire creates a big portion of Sea’s digital entertainment revenue, which rose 80% year over year in the very first 9 months of 2020 and represented 47% of the company’s top line.

That profits development is impressive, however a better look at the digital home entertainment system’s adjusted EBITDA– which offset Sea’s e-commerce and fintech losses over the previous two quarters– reveals just how important Free Fire is to Sea’s future:

Data source: Sea Limited.

To put it simply, Free Fire’s development buys Shopee and its payment platform SeaMoney more time to narrow their steep losses.

Keeping players participated in Free Fire might seem tough as the game enters its 4th year and the battle royale genre grows. To counter that slowdown, Garena is evaluating out Free Fire MAX, an improved version for higher-end gadgets, across a number of markets. It’s likewise constantly refreshing the game with new functions and rewards.

Looking ahead, Garena might still promote Free Fire in brand-new markets– such as North America, Europe, or Northeast Asia– or even accredit it back to Tencent (which owns a substantial stake in Sea) for Chinese players. In other words, there are still lots of ways for Garena to keep Free Fire’s flame alive.

Sea Limited is a promising development stock, but it’s deeply unprofitable by GAAP standards and its positive adjusted EBITDA is pinned to a single mobile game. Free Fire is still incredibly popular, however investors ought to keep tabs on its growth to see if it can continue to support Sea’s unprofitable e-commerce and fintech divisions.