Sea Limited's (SE 1.05%) gaming business, Garena, is a classic example of a fallen angel.
It went from being a fast-growing and highly profitable gem to a problem child, enduring a continuous cycle of falling revenue and profitability for many quarters.
However, green shoots indicate that the gaming company hit the bottom in the second half of 2023 and is set for better times in 2024 and beyond.
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Garena had a challenging period in 2022 and 2023
When the COVID-19 pandemic hit, most companies went into deep trouble. But not Garena. The demand for its games went through the roof in the next few quarters. For instance, quarterly active users (QAU) jumped from 402 million in the first quarter of 2020 to a peak of 729 million in the third quarter of 2021.
But before investors could celebrate, the gaming business gave up most of those gains in the next few quarters. QAU fell to a low of 486 million in the fourth quarter of 2022, while bookings reached a low of $443 million in the second quarter of 2023 (bookings were at $1.2 billion in Q3 2021). Consequentially, Garena's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) declined from $2.8 billion in 2021 to $921 million in 2023.
A series of challenges, such as post-pandemic reopening, a ban on its India operation, and a few poor decisions from its management, drove the weak performance.
Early signs that Garena hit a bottom in 2023
While nobody likes a declining business, investors found comfort in knowing that the management team did not sit idle when facing the headwinds. Garena cut costs, sold off unnecessary assets, and doubled down on its core franchise, Free Fire.
So far, these actions have helped stabilize the declining business. For instance, bookings reached a bottom of $443 million in Q2 2023 and have since been inching up slowly over the subsequent quarters.
Another notable stabilization was on the QAU metric, which has stayed above 500 million after recovering from its low of 486 million reached in 2022. Moreover, Free Fire was the most downloaded game globally in 2023, significantly improving Garena's QAU.
Investors were also relieved by the news that Free Fire would relaunch in India after the government's earlier ban. While Garena did not provide a specific date, there is news that Free Fire will relaunch in India in 2024.
Garena delivered another quarter of solid progress
Garena might have stabilized its business in the second half of 2023, but investors were still unsure whether the company would stagnate at that level or improve further in 2024.
Fortunately, Sea Limited's Q1 2024 earnings gave investors hope that the positive momentum would continue. Operationally, QAU rose 21% to 595 million , the highest since Q3 2022 . Quarterly paying users jumped 30% to 49 million, with paying user ratio improving from 7.7% in the same period last year to 8.2%. These operational improvements led to an 11% improvement in bookings and a 27% increase in adjusted EBITDA.
It has been more than two years since Garena reported a solid quarterly result, a breath of fresh air. More importantly, it gives investors hope that the gaming company is on track to deliver double-digit growth in Free Fire's user base and bookings in 2024.
What it means for investors
Garena has been a problem within Sea Limited over the last two years amid its steep decline in revenue and profitability.
Fortunately, there are signs that the worst is over, and that the gaming business is poised for better times.
Investors should closely monitor Garena's performance in key metrics like bookings, user growth, revenue, and profitability in the coming quarters to gauge the sustainability of its turnaround.
