3 things every Sea Limited investor should know

Sea Limited (NYSE:SE) has made many headlines over the past few months, and not in a good way. Here are a few things that hurt the Singapore-based company in 2022:

  • The Chinese company Tencent reduced its participation.
  • The Indian government has banned its hit mobile video game Free fire.
  • The company announced that it was withdrawing its e-commerce company, Shopee, from India and France.

This is not an exhaustive list of all the news coming out of Sea Limited, but it does show that investors have been faced with a host of negative news. In addition to the broader growth stock selloff, these events have sent Sea shares down 66% from their all-time highs set in October 2021.

While this endeavor may seem like a lost cause right now, there are a few reasons for hope. Here are three things investors need to know about this fast-growing super app.

Image source: Getty Images.

1. Volatility is likely to continue

The events I noted above aren’t the only reasons the company has lately collapsed. Sea noted in its fourth quarter report that its Free fire bookings are expected to drop. The company forecasts full-year 2022 bookings of $3 billion, which would be a sharp drop from that company’s 2021 earnings of $4.6 billion.

It’s probably because of Free firedeclining popularity. It was one of the most popular video games in the world, and it was even the most downloaded mobile game in the world in 2021. However, no game stays on top forever, and Sea Limited could see the start of an understandable decline.

When you combine that with Shopee pulling out of countries investors had high hopes for and sprinkle in some geopolitical uncertainty with its ties to China, it’s easy to see why the seas have dropped so much.

That being said, this may not be the end of this volatile story. The effects of Sea’s connection to China are still relevant. Sea Limited is not from China, but Tencent’s 19% stake in January 2022 makes it vulnerable to the risks of this association.

Despite these uncertainties, investors should be invigorated to see Sea Limited trading at the current price. The company is on track to continue growing at a rapid pace over the next few years.

2. The game becomes less important

One consequence of Sea’s declining gaming revenue is that the company’s profitability will likely decline as well. Its gaming business is the only profitable segment based on adjusted EBITDA, so lower growth in this segment could knock profitability off a cliff.

Nonetheless, management noted that this issue will become less of a concern in the future. Shopee is on track to achieve positive Adjusted EBITDA (excluding HQ expenses) this year in Southeast Asia and Taiwan. Additionally, SeaMoney – the company’s fintech offering – is expected to be cash flow positive in 2023. While there are many caveats and adjustments to these metrics, they point to an overall trend of profitability for Sea.

This trend is critical. Not only would this reduce Sea’s dependence on the profitability of its gaming business, but it could also result in Shopee and SeaMoney being self-funding. If this happens, the company could continue to spend a lot of money to extend the growth time of these segments.

3. Sea Limited is just getting started

The growth recorded by SeaMoney and Shopee in recent quarters has been impressive; however, both segments still have room for growth. Shopee expects its revenue to grow 76% year-over-year in 2022, and that’s on top of its 136% revenue improvement in 2021. Although it doesn’t may not extend to France or India, it still has its hands on new markets. Shopee recently announced a launch in Spain and Poland – its first major entries in Europe. If Shopee succeeds there, it could mean continued success.

SeaMoney is another reason for optimism. It grew its revenue 711% year-over-year in the fourth quarter to $197.5 million, and its quarterly number of active users reached nearly 46 million. Indonesia’s population exceeds 278 million, so the potential of this region alone could drive SeaMoney’s success there, let alone the rest of Southeast Asia.

Despite all the bad news apparently, this could be a good buying opportunity for long-term investors. The potential of SeaMoney and Shopee is still huge, even after the failures in France and India. The company’s trend toward profitability is also a green flag, and while that should be watched, it should keep investors bullish.

The shares are trading at just 6.6 times sales – a valuation Sea has only traded once in its entire life as a public company. Because of this dichotomy between price and opportunity, it might be worth buying stocks today.

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Jamie Louko owns Sea Limited. The Motley Fool owns and recommends Sea Limited and Tencent Holdings. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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