Top News

#1: Sea’s Rising Tide is Not Attributable to Gaming

Source: Sea Ltd

Sea Limited, the Singapore-based technology and gaming holding company behind battle royale developer Garena, released their fiscal Q4 F2022 results on March 7th. The company surprised investors by reporting net profitability for the first time since it went public in 2017. 

GAAP EPS for the quarter was $0.72, a significant beat versus the analyst consensus of a $0.83 decline. Adjusted EPS similarly beat, coming in at $1.01 versus estimates of a decline of $0.55. Revenue also experienced a year-over-year jump of 7.1% to $3.45 billion, while consensus called for $3.05 billion, or a 5.3% decrease from this time a year ago. 

These upbeat results propelled NYSE-listed Sea Ltd (SE) to a 22% gain the next day in a reaction similar to its Q3 earnings report, which led to shares surging 36% last fall. From its bottom on November 9th, 2022, where shares closed at $40.92, SE is now trading 83% higher at $74.79 as of March 12th. This is still materially lower than its $366.99 all-time high in October 2021, just before broader tech stocks slumped and quickly entered bear market territory.

Sea’s rich valuation in 2021 was due to the torrid pace at which revenues were growing. Investors expected sales to continue surging into 2022 before the tech earnings recession gripped Wall Street. NTM revenue in November 2021 was expected to be $13.4 billion, with a forward EV/Sales ratio of 13.8x. Today, Sea’s forward revenue projections are roughly in line with what was projected 16 months ago, and valuation based on EV/Sales has collapsed to 3.3x. 

Source: Koyfin

To understand Sea’s results, it’s important to look at each of the company’s three major segments. These include digital financial services through SeaMoney, e-commerce through Shopee, and video game development and publishing through the Garena business. We’ll cover the first two quickly and spend the most time on gaming.

While growth has slowed at SeaMoney, GAAP revenue still surged by 93% from Q4 2021. The unit remains Sea’s smallest by a wide margin as quarterly revenue comprised around 11% of the total. But it has grown as mobile wallets, driven by SeaMoney’s own subsidiary ShopeePay, have swelled in transaction volume in recent years. On the earnings call, CEO Forrest Li said the segment represents “an important long-term growth engine” for the overall group.

The e-commerce arm Shopee saw GAAP revenue grow 32% from Q4 2021, due to strong growth in the core marketplace. Shopee has maintained its position as one of the most used e-commerce apps in Southeast Asia, a region with supportive demographic trends and one with rapidly growing GDP per capita resulting from a favorable business environment. This segment is also profitable on a GAAP and adjusted basis. 

Part of the quarter’s earnings beat is due to this drop in revenue. Management slashed its cost of revenue for the gaming portfolio by 35.3% from Q4 2021 to Q4 2022. Conversely, cost of revenue for other services rose marginally by 3.8% over the period. What was slashed across the whole group were sales and marketing expenses, which fell by 60.5% for Garena, 54.9% for Shopee, and 86.9% for SeaMoney. In the gaming world, falling marketing expenses means lower user acquisition, with the potential of lower retention as well if content costs fail to keep up. This drop in marketing was intended to shore up profitability in a tough macro environment, a strategy which may work for e-commerce and digital payments, but one which may continue Garena’s rapid decline.  

Now onto gaming. Note that Garena has historically made up about half of Sea’s overall revenue, though this contribution has obviously decreased since the company’s launch of SeaMoney in 2014 and Shopee in 2015. Going into 2022, Garena’s contribution to group revenue plunged from 43.4% in 2021 to 31.1% in 2022, a result outside of what recent trends would indicate. The cause was twofold: revenue at Sea’s other segments continues to increase, albeit at a slower rate, while Garena’s performance has suffered due to the weakening of its core title, Free Fire, and a lack of investment in other parts of the segment. 

Naavik, with data from Koyfin
Source: Naavik, with data from Koyfin

Garena makes money in three ways: as a game developer, as a publisher and partner, and as an esports organizer. On the publishing side, this has included major titles like League of Legends and Teamfight Tactics via a longstanding partnership with Riot Games, which ended last November. It also includes many mobile games in specific regions, such as Arena of Valor in Indonesia and Vietnam and Call of Duty Mobile in Southeast Asia and Taiwan. Since 2017, Garena has focused on publishing mobile games, including two of its own — Free Fire and Free Fire MAX, the latter of which is just a graphically enhanced version of Free Fire.

In terms of esports, tournaments are primarily held for  Free Fire across Southeast Asia. These include the Free Fire World Series, which is a biannual competition with a prize pool of around $2 million. Garena also hosts the Call of Duty Mobile World Championship, targeting the same region where mobile esports enjoy more popularity than their console and PC counterparts. 

Free Fire is a popular mobile battle royale game developed by Garena and published in 2017 on Android and iOS. Like other PUBG-inspired titles, Free Fire players are dropped onto an island and must scavenge for weapons, equipment, and resources while fighting 50 other players to be the last one standing. The game has a variety of modes — including solo, duo, and squad — and features a variety of weapons and vehicles to aid players in their survival. We’ve discussed the history and mechanics of the game in more detail in our March 2022 deconstruction of Free Fire.

But just how much do esports and these dozens of published, non-Free Fire games contribute to Garena’s revenue? For this we need to dig into Sea’s most recent annual form 20-F, the report roughly equivalent to a 10-K that foreign companies domiciled outside of the U.S. and Canada must prepare. This would be the one from 2022, since companies have four months to file this, and Sea’s 2023 version has not yet been released. 

In the risk section related to the digital entertainment business, Sea stated the following: 

Among our online games, we substantially depend on a small number of popular games, including our first fully self-developed game, Free Fire, a global popular battle royale type of mobile game, which was launched in December 2017. In 2021, our top five games, comprising Free Fire and games licensed to us by third-party game developers, contributed 97.4% of our digital entertainment revenue, among which Free Fire contributed a significant portion.

This type of concentration has two problems that should caution investors wanting to ascribe an appreciable multiple to Sea’s gaming portfolio. One, there is the risk that Free Fire continues to wane in popularity, as the game makes up a “significant portion” of Garena’s revenue, which itself has historically been close to half of Sea’s top-line. According to data from our partners at, cumulative worldwide Free Fire and Free Fire MAX revenue across both stores has fallen dramatically from its peak. In December 2021, the combined gross was $68.2 million, while in February 2023, it totaled $24.4 million, or a decrease of 64%. Note that this data only includes microtransactions, while advertising also makes up a portion of total revenue. 


Another risk is that the games that round out the top five, all of which are third-party titles, drop out of their publishing agreements with Garena. As previously mentioned, this has already played out, after Riot Games ended its partnership with Garena for publishing games in Southeast Asia on November 9th of last year.  These titles included League of Legends and Teamfight Tactics, which are probably two of the remaining four games mentioned by the company in their concentration risk disclosure. 

This dissolution took place in January of this year, meaning that Q1 F2023 may be even worse for Sea’s digital entertainment business. The loss of these key titles means Sea will be looking elsewhere to make up for lost revenue, something investors shouldn’t hold their breath for. On the recent earnings call, management did not have much to say on Garena other than answering a question from Thomas Chong of Jeffries, who asked about the company’s full year outlook. CFO Yanjun Wang responded that “the key focus in the near term is still on the core games and, in particular, Free Fire.” Free Fire is going to be a hard ship to turn around given the number of active users, particularly paying users, have declined in recent quarters.

Sea Ltd
Source: Sea Ltd

Management has tried to obfuscate the drop in active users by only showing the two most recent quarters in its investor presentation. But in the Q3 report, the visualization showed just how much Garena users (which, again, translates mostly to Free Fire players) have fallen from their peak: from 729 million in Q3 2021 to 485.5 million in the recent quarter. Percentage wise, the drop from Q3 to Q4 2022 is the largest ever drop since reporting has been available.

Sea Ltd
Source: Sea Ltd

In early February, Phoenix Labs, the developer of popular free-to-play RPG Dauntless, was spun off from Garena after the studio’s founders executed a buyout and took it private. This came just two years after Garena acquired the studio for $150 million in December 2020. At the time of acquisition, Dauntless had over 25 million registered players. While this move reinforces Sea’s recent focus on profitability, it also exemplifies Sea’s shift away from Garena toward higher margin and higher growth areas like Shopee. Like the terminated Riot partnership, the effects from this spinoff should start to be seen in Q1, exacerbating the decline in QAUs going forward.  

All of Sea’s segments were hit in 2022 as ecommerce, gaming, and digital payments growth all slowed in the post-lockdown era. Gaming was the hardest hit among all of these, as active users declined, reducing advertising revenue, and paying users spent less on microtransactions due to the rising cost of essential goods. Sea would have to spend much more in marketing to keep revenues growing, a tradeoff it was not willing to make due to investor scrutiny regarding profitability. 

While Garena was once a powerhouse for Sea, the company has now entered a defensive posture centered around Free Fire. If new studios are acquired at all, these deals will likely be opportunistic rather than strategic. The growth of Shopee and SeaMoney into profitable enterprises relieved some pressure off Garena’s success, and as sentiment around gaming remains low, we are likely to hear less and less about the developer until Free Fire eventually shuts down its servers.

#2: Believer Entertainment Raises Enormous Round to Fund Enormous Project

Believer Entertainment, a newly founded gaming studio headquartered in Los Angeles, raised a huge $55 million Series A round on March 7th. The round was led by Lightspeed Venture Partners, whose partner Moritz Baier-Lentz joined Believer’s board. Other investors in the round included Riot Games, BITKRAFT Ventures, and The Tornante Company. According to Pitchbook, this is the second funding round after an earlier round was completed last November. 

The studio was founded by ex-Riot Games’ employees Michael Chow and Steve Snow. Chow, who is CEO of the studio, was previously executive producer of League of Legends: Wild Rift, a mobile MOBA game built in Unity. He also was one of three founders of Newtoy, the developer behind Chess with Friends and Words with Friends. 

The studio was acquired by Zynga in 2010 for $53 million in cash and an undisclosed amount of Zynga stock. Snow is CPO and previously spent 12 years at Riot, which he joined in 2009 just before the launch of League of Legends. He also was director of Teamfight Tactics, Riot’s second game released in 2019 and based on the auto battler Dota Auto Chess. 

Believer is looking to build out a world class team of games market professionals to create the next “great open world game.” The prospective title would be heavily based on the player’s choices, a model pioneered by late 2000’s open world games like GTA IV and Fallout 3. Snow and Chow plan on developing a next-gen experience based on original IP, although they have yet to share any details about the project. 

The open world genre — though historically reminiscent of Bethesda, Rockstar, and Ubisoft titles — has experienced a bit of a renaissance in recent years thanks to boundary-pushing releases like FromSoftware’s  Elden Ring, Nintendo’s The Legend of Zelda: Breath of the Wild, and CD Projekt Red’s The Witcher 3. All three of those games sold tens of millions of copies, earned multiple “Game of the Year” awards, and pushed the industry to rethink open world game design. 

These titles offer players a sense of freedom, exploration, and immersion, while also lending themselves to replayability due to their open-ended nature, more flexible RPG mechanics, and challenging combat. In a survey conducted by Japanese gaming magazine Famitsu published last May, 1,700 participants were asked what their total playtime was for Elden Ring. The most common answer was between 100 to 149 hours. 

While it’s unclear what monetization strategies the Believer team will use in their game, this type of focus on a singular title lends itself to a games-as-a-service strategy, which may feature an in-game store, season passes, and other microtransactions. There also is no word yet on whether NFTs would make their way into the game, as is the case with Midnight Society’s upcoming shooter Deadrop, which faced criticism after co-founder Dr. Disrespect touted “extracting” valuable NFTs from the game

There are a number of reasons why the funding round was so large, which were addressed in a GamesBeat interview concurrent with the raise. For one, the team plans on expanding from its current headcount of 12 to 50 by the end of 2023. The team’s website currently has job postings for eight employees in creative, three in design, seven in engineering, and one in production, who would serve as a senior development director. The current team also includes a seasoned C-suite: CCO Jeremy Vanhoozer, CTO Landon McDowell, and COO Tim Hsu all have leadership experience at top gaming developers like Bungie, EA, and Riot. 

Chow is also citing the current economic climate as a justification for the large raise. He believes if things deteriorate further, it may be even more difficult to secure funding dollars to develop such an ambitious project. He described the company’s strategy as a “marathon that lasts for decades.” Ultimately, the co-founders of Believer were right in assuming the funding environment would get more unfavorable, given the events that unfolded subsequent to the round.

Lastly, it’s evident that the team has assembled a diverse slate of investors with deep pockets. All of the VCs that participated in the round have something to offer beyond just a check, such as industry connections and advisory. Chow described Lightspeed as an “incredible fit,” indicating that firms were really lining up to finance this deal, and the Believer team had leeway in choosing which would lead the round. 

The Tornante Company founder Michael Eisner will be serving as a strategic advisor to the firm. Eisner will help Believer build a content franchise beyond a “single media type,” as the developer plans to foray into other platforms such as “film, television, and collectibles.” Chow and Snow may be looking at League of Legends’ success beyond the core game here, which includes two tabletop games, three books, and four films and animated series. Given the development challenges that will be associated with the game alone, the team should plan on this being a very long-term endeavor. Exploring other mediums will require much more capital than what Believer has raised, and will be contingent on the success of the game. 

Research from our Naavik Digest issue earlier this month shows just how challenging it is for a VC to realize a large exit with a video game company. Just 19 companies have had an exit larger than $400 million since 2010. With a $55 million raise and assuming a standard 20% to 30% ownership share to the VCs after the Series A, this puts Believer’s valuation at between $180 million and $275 million. 

So for investors to realize a meaningful cash on cash return, Believer’s exit would have to rank in the gaming history books. This reinforces just how much faith investors have placed in the company. Anything other than a resounding success from the company’s first project might mean it’s the only piece of media Believer ever produces.

Top Movers

Weekly Top Gainers
Source: IDC
  • For the week ending March 10th, 2023: the average return for gaming companies tracked by Naavik with a market capitalization exceeding $500 million was  -2.2%. The S&P 500 returned -4.6% and the Nasdaq-100 returned -3.8%.
  • Last week was challenging for the broader market due to the collapse of Silicon Valley Bank. This led to a risk-off environment which primarily affected financials but also many smaller tech companies that used SVB for financial services.
  • Sea Ltd was the top gainer for the week, as the company unexpectedly reported a quarterly profit for the first time since going public in 2017. This was due to marketing expenses being cut by $746 million across all of the group’s segments. Revenue from the gaming segment Garena continued to decline, as Sea reduced emphasis on its games pipeline in favor of defending Free Fire profitability.
  • High beta names like AppLovin and Unity slid after the fallout from Silicon Valley Bank’s unexpected closure. On Friday, Unity disclosed that about 5% of its cash and cash equivalents were held at the bank. On Sunday however, the Fed announced that all uninsured SVB depositors would be made whole, which should reverse some of last week’s decline.

Most Notable Venture Financings

  • Redemption Games spun off from mobile analytics and marketing firm AppLovin and raised $7 million to become an independent studio. AppLovin first acquired the studio in May 2020, just after the successful launch of their title Sweet Escapes in 2019, which was the year’s “fastest growing puzzle game in the app store.” The team was also behind the launch of popular tile-matching game Cookie Jam, which released in 2014 under publisher Jam City. The studio’s gross sales to date have totaled over $1 billion. Redemption seeks to use its newly found autonomy to create puzzle games utilizing blockchain technology and AI. (Link
  • Matchday raised $21 million in seed funding in a round led by Play Time, the venture capital firm backed by Argentinian star footballer Lionel Messi and tech entrepreneur Razmig Hovaghimian.  The startup is partnered with FIFA and various players to bring their likeness into their football management mobile game. Gamers can purchase packs of player cards that can come in one of five rarity tiers, though everyone starts with a handful of “Common” cards. These can then be bought and sold on the Matchday marketplace, or exported to an NFT wallet. However, Matchday does not consider itself to be a Web3 company and its cards are not NFTs in themselves. (Link)
  • Tangle raised $4 million in funding to further development of its remote-work application, which provides a “virtual space for teams to connect, collaborate, and have fun.” This brings the company’s total funding to date to over $10 million. Tangle was founded by game developers Alex Schwartz and Cy Wise, who sold their VR games studio Owlchemy Labs to Google in 2017. Qualcomm Ventures, who led the round into Tangle, was also a seed investor in Owlchemy in 2010. (Link)

Other News

Private Division
Source: Private Division
  • Restructuring activity continued to affect the games industry, as Take-Two, Ubisoft, and Gameloft all consolidated. 
  • Take-Two laid off a number of employees at publishing subsidiary Private Division. This was primarily aimed at “corporate operations and label publishing.” Private Division is the company’s third largest label behind 2K and Rockstar Games, and it has published titles including Kerbal Space Program and Hades. (Link)
  • Ubisoft is undergoing a “strategic reorganization,” which allegedly includes the shuttering of its Benelux office in Western Europe. Employees in the office are all slated to leave by April 1st, with distribution being outsourced to a yet to be named entity. Other Ubisoft subsidiaries in Europe will also be subject to reorganization as the process remains ongoing. (Link)
  • Gameloft closed its mobile-focused studio in Budapest and let go around 100 employees. The French video game publisher plans to focus more on the console and PC market, after its success with Disney Dreamlight Valley. This title launched in early access last September and had over one million players within two weeks of its debut. (Link)
  • According to research from GfK, PS5 sales surged 316% in February from the same month last year. In comparison, the Xbox Series S and X are only up 15% over the period, and Nintendo Switch sales actually declined by 29%. Games that contributed to the surge included Hogwarts Legacy, which remains a top seller over a month after its launch, FIFA 23, and Modern Warfare 2. The success of PS5 over its peers was covered more in detail in our Financial Markets Update on February 21st. (Link)

A big thanks to Mario Stefanidis, CFA for writing this update! If Naavik can be of help as you build or fund games, please reach out.

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