Once the most dominant business within Sea Limited (SE 3.90%), Garena has fallen behind the limelight of its younger sister company, Shopee, as the latter became the most significant revenue contributor to the Singapore-based conglomerate.
Yet, Garena remains important to Sea's overall long-term strategic direction. Its solid recovery in 2024 also suggests it has the necessary ingredients to grow in the coming quarters.
Image source: Getty Images.
A respectable performance in 2024
The last five years have been a roller-coaster ride for Garena. Thanks to the surge in demand, it was at the peak of its game when the COVID-19 pandemic hit in 2020. In the third quarter of 2021, it had 729 million quarterly active users (QAU) -- 1 in every 7 humans on Earth is a user. But the good times didn't last, and Garena's performance quickly fell to a trough as the world reopened.
Fortunately, things stabilized by the end of 2023. Since then, QAU has improved from 529 million to 618 million in the fourth quarter of 2024. Similarly, bookings have improved by 19%, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) surged 30% in 2024.
While Garena's user base remains below its peak in 2021, it is still massive, considering that over 600 million users play the game quarterly. Even on a daily basis, it has more than 100 million active users, making it one of the largest mobile gaming companies globally. Besides, it remains a hugely profitable business, generating $1.2 billion in adjusted EBITDA in 2024.
But it's still overly reliant on a single title
Garena's solid performance in 2024 was a result of the strength of its flagship title, Freefire. On its own, this title contributed more than 100 million daily active users (DAUs), making it the largest mobile game globally by DAU. And despite its size, Freefire grew DAUs by 28% in 2024 thanks to the growth in user base in Asia, the Americas, and Africa.
While owning a hugely successful franchise like Freefire is great, it also exposes the company to concentration risk. If and when users get bored with Freefire or find another, more interesting game, they could leave the platform en masse. And if, by then, Garena remains dependent on just a single title, it could suffer a huge decline in revenue and profits.
The missing of a second blockbuster also raises questions about the company's game development capabilities. Why couldn't the company, like its more successful Asian peers such as Tencent and Netease, continuously bring new titles to the market? While Garena partially reduces this risk by partnering with game developers like Tencent to publish games in its local market, the lack of new in-house titles raises the issue of the sustainability of Garena's long-term growth trajectory.
Still, Garena is well-positioned to sustain its growth
Garena has real issues to solve to sustain its growth momentum in the coming years, but its short-term prospects remain positive thanks to Freefire's ongoing strength.
Freefire has a huge user base spanning 160 markets, making it less reliant on any single market. Besides, it is still growing its user base, both in existing and newer markets. For instance, it has been growing its presence in Africa. In Nigeria, active users surged 90% after the company invested in infrastructure to improve connection speed.
Beyond Africa, India remains a hugely untapped market for Freefire, especially since the Indian government lifted the ban on the game last year. While there is no news on when Garena will bring back Freefire, it is likely a matter of time before it happens.
On its own, Garena's management team is working hard to keep the game hyper-localized, bringing local culture and trends into the game to keep users engaged. For instance, in Indonesia, users can donate in-game currency to renovate an orphanage in West Java. Another example is running an esports event in Brazil last November.
In all, Garena expects to grow by double digits year over year in 2025 in terms of user base and bookings.
What it means for investors
Garena has gone through a difficult period of underperformance for a few years. But thanks to Freefire, Garena is back on its growth trajectory. Yet, relying on a single title makes it highly vulnerable, even though it remains one of the best mobile games globally.
As an investor in Sea, I will closely monitor Garena's performance in the coming quarters for clues on the sustainability of its growth trajectory.
