I estimate Shopee will do $34B in GMV in 2020. At a 10% normalized take rate, that’s $3.4B in revenue. Apply a 10x sales multiple indicates that Shopee is a $34B business. If you assume a 25% normalized operating margin for Shopee, that’s around 40x normalized earnings (reasonable, I think, given current long-term interest rates and Shopee’s growth rate).

Let’s conservatively estimate that Garena does $1B in EBITDA this year. It’s not really growing, so let’s say it is worth 10x EBITDA. That’s a $10B business.

Thus, you can arrive at a $44B valuation for Sea based on Shopee and Garena alone, not factoring in the possible future value of SeaMoney. As a very smart hedge fund manager who I know recently told me, Sea has never been a first-mover in a market – they were late to gaming, and they were late to e-commerce. But, they are experts at reverse engineering what works and coming back from behind. Right now, Grab, Go-Jek, OVO, and others are leaders in e-wallets and digital payments in SEA, but given Sea’s track record, I think there is a reasonable chance they come back from behind. Grab and Go-Jek both started in the ride-hailing business, which has been challenged during COVID-19, and both conducted layoffs, which should allow Sea to invest far more than them and overtake, given Sea’s relative strength during this time period.

Bain, Google, and Temasek’s 2019 SEA internet economy report projected that the total GMV of SEA’s e-commerce market would hit $153B in 2025. All indications suggest that COVID-19 will “pull the future forward”, so let’s assume that now, SEA’s e-commerce GMV will be $200B in 2025. Alibaba has ~60% GMV share in China, where it is the market leader, so let’s assume that Sea has similar share in 2025. That would mean Shopee’s GMV would be $120B, making it a $120B business using similar assumptions to above. Sea’s total value would include gaming and digital payments, which are harder to project 5 years out, so they offer a call option of sorts.

Sea has a phenomenal management team with a great track record, and is owner-operated and founder-led. They’re riding three major mega-trends: PC/console to mobile gaming, offline to online commerce, and cash to digital payments. When you see such a management team riding such long-term trends, I’m inclined to invest assuming the valuation is reasonable. I would consider $44B to be a reasonable valuation right now.

A key risk is that Shopee is not profitable (it’s actually negative gross margin except for Taiwan), and it’s not clear how much of their market share gains are purely a result of below-cost selling. I think that the counterpoint is that marketplaces are known to have significant economies of scale, and Lazada, Shopee’s biggest competitor, knows this and has bigger pockets than Sea. Thus, Lazada’s strategy would have likely been to take massive losses all these years to drive out Shopee, and that’s probably what they’ve tried to do, but it clearly hasn’t worked. And with Shopee being the market leader now, taking even wider losses is unlikely to all of a sudden work for Lazada.