Over the past five years, Sea Limited (SE +5.24%) shares jumped over 800%, and shares of Datadog (DDOG +0.59%) have risen 374%. Even considering these amazing run-ups in the past, each company has gained dominance that could continue to push these high-quality businesses further over the next five years.
Sea Limited's immense optionality and go-to-market success in all of its businesses segments give me confidence that the company can succeed in its new markets. Datadog's observability platform is becoming mission-critical to a business for platform monitoring as it has consistently expanded its offering. Despite their past success, both companies are continuing to innovate, which is why I think they could continue growing rapidly over the next five years.
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1. Sea Limited: Broadening its reach
Sea's past success has primarily come from one of its three business segments: Its gaming segment, Garena. With this mobile game development tool, Sea developed the hit game FreeFire -- a mobile battle royal game -- which propelled the company into massive fortunes. When FreeFire launched in December 2017, the company's quarterly gaming revenue was just $142 million, but its recent quarter shows the effects of Sea's successful game, posting gaming revenue of $1.1 billion.
Now, after FreeFire has amassed 729 million quarterly active users and become one of the most popular video games in the world, FreeFire popularity is starting to wane. User growth is starting to decelerate along with revenue in the segment. To counter this, Sea has done two things. First, it has invested in updates to drive higher engagement and monetization of FreeFire like Lone Wolf Mode -- a new mode with exclusive skins and gameplay options.
While these investments are not permanent fixes for FreeFire but just temporary efforts to prolong its life, they are monetizing users successfully, bringing the number of paying users up 43% year over year to 93 million.
The second thing that Sea is doing to counteract FreeFire is ramping up its two other businesses -- Shopee and SeaMoney. Shopee, which has already become one of the biggest e-commerce platforms in Southeast Asia, is now being brought across the world into Brazil and Europe. In Brazil, Shopee faces competition from MercadoLibre (MELI +1.70%), but after just two years, some reports say that Shopee has already beat MercadoLibre as the largest e-commerce app.
SeaMoney -- Sea's third business segment -- is the smallest segment, but it is seeing strong adoption in Southeast Asia. The financial platform could become the all-in-one payments app with the potential launch of buy now pay later and insurtech solutions. Because of SeaMoney's innovation, it is seeing rapid adoption from users. Users grew 121% from almost 18 million users in the third quarter of 2020 to almost 40 million today. According to Statista, the digital payments volume in Singapore is expected to nearly triple to $28 billion by 2025. Considering that Sea has under $5 billion in payment volume, Sea's growth opportunity in this area is extreme.
Sea has been drastically spending more on sales and marketing expenses, likely due to the company's efforts to expand Shopee internationally. If the company's investments today in getting Shopee established in its new geographies prove to be successful, the company has the potential to bring in much more money than it paid for in expenses. This potential benefit from its new geographies massively outweighs the current costs of expansion, so as the company settles into these new markets, Sea's profitability will likely improve.
What really makes this company special is its immense optionality and non-reliance on any one business segment. Although Sea Limited has relied on FreeFire in past, the company has been able to expand Shopee to the point where it recently overtook the digital entertainment business as the largest segment in terms of revenue. This came after growing the top line 134% year over year to $1.5 billion in Q3, showing that this three-headed dragon can see continuous success from three independent businesses at once.
2. Datadog: The need-to-have monitoring platform
The 370% appreciation that Datadog shares have seen over the past five years is just the tip of the iceberg of the next five years. Datadog serves as the core observability platform for businesses, and it is quickly becoming the primary cloud monitoring platform. With Datadog, businesses can monitor their network, infrastructure, app performance, and a host of other key parts of their cloud presence to ensure it is running smoothly.
Companies are becoming more integrated into the cloud, which means they need to rely more on Datadog's tools to ensure that everything is operational and secure. As more companies transition to a heavier cloud presence, their infrastructure can get more complicated, resulting in the need for more complex tools. Datadog has noticed this and has been developing new tools like enhanced visibility into code databases and iOS error tracking.
Dozens of these new tools have been recently announced and have been quickly adopted by customers. The number of large customers spending over $100,000 increased 66% year over year to over 1,800 customers. In Q3, this acceptance of its newest products continued to push the company toward profitability. Its net loss represented less than 3% of gross profit compared to 12% in the year-ago quarter.
There has been rapid growth in the company's R&D budget which is causing the company to be unprofitable, but this could be seen as more of an investment. The company sees a $53 billion market opportunity by 2025 -- which is 40% growth from today -- and Datadog's heavy investment in research and development indicates that it is trying to capitalize on the fast-growing market.
For both companies, the stock prices have followed very consistently with their stellar business performances, and I expect that to continue as operations move forward. The name of the game for them is optionality, and both are proving their ability to do so every quarter. Because of Datadgo's ability to execute so well, its price-to-sales ratio has hovered in the high 50s for the year, but Sea's valuation has dropped despite its performance. It is currently valued at 16 times sales.
For Sea Limited, continued expansion of Shopee and SeaMoney could lead to sustained performance, and Datadog should continue bringing innovative products to its customers. If Sea and Datadog keep doing these things, I think that both companies could assist in early retirement if held in a diversified portfolio.
