Sea Ltd (NYSE: SE) shares slid by almost 20% on Monday as the company ran into trouble with its operations in India. We're here to look at whether these problems are quite the roadblock they first seem to be and whether Sea Ltd looks like a good investment for 2022.
What is Sea Ltd?
Sea Ltd is a Singaporean tech conglomerate which was founded in 2009. The company has more than 33,000 employees and started life as Garena Interactive Holding Limited, before being renamed in 2017.
The company’s operations are divided into three segments, which are digital entertainment, e-commerce, as well as digital payments and financial services. Businesses owned by Sea Ltd include Garena, Shopee, and SeaMoney.
Sea Ltd also owns the Lion City Sailors FC football club, which plays in the highest tier of the Singaporean league system and is reigning champion of the S League.
Why is Sea Ltd’s Share Price Down?
Sea Ltd saw its share price dip after India’s Ministry of Home Affairs announced a ban on 54 Chinese mobile apps. The list of banned apps includes Free Fire, a wildly popular mobile game developed and published by Garena, which is owned by Sea Ltd.
This is despite the fact that the company is based in Singapore, rather than China.
Even so, the news is a major blow to Sea Ltd because India represents by far the largest player base for the game, with the nation accounting for 40 million of its 75 million global monthly active users according to TechCrunch.
Essentially, the game is Garena’s marquee title and it has just run into a huge problem in an enormously significant market.
How Does Sea Ltd Make Money?
Digital entertainment, which is the segment containing the Garena business, is responsible for a fair chunk of Sea Ltd’s revenue. This money is made through a digital entertainment platform which provides access to mobile and PC online games, as well as esports operations.
In the three months ended September 30 2021, the segment achieved revenue of $1.1bn. This amounted to growth of 93% compared to the same period 12 months prior and represented 41% of total revenue.
The company uses its games to spread the popularity of its ecommerce platform. As gamers in new geographies pick up the games, they are urged to visit Shopee.
The same period saw ecommerce and services revenue grow by 168% to $1.3bn and goods revenue grow by 82% to reach $279.6m. These segments incorporate Shopee and SeaMoney.
SE Financial Overview and Metrics
P/BV: 9.2
P/S: 8.1
Market cap: $72.9bn
Is Sea Ltd a Good Investment?
The news that one of the company’s biggest games may be facing a ban in India is alarming, but it is unclear whether this will go ahead. After all, this action appears to be taking place as a broad move against Chinese apps, rather than Singaporean ones.
Furthermore, the game is also the top grossing mobile game in Southeast Asia and Latin America, so India isn’t necessarily essential.
However, Free Fire is not all there is to Sea Ltd’s business. The company’s ecommerce and services segment is showing impressive revenue growth. However, the company still returned a net loss of $571m in its third quarter.
These deep losses make the stock look like a risky proposition, though it is achieving impressive growth.
But Sea Ltd’s share price has fallen by 42% since the start of 2022 and has dropped by 54% over the last 12 months. The company’s shares reached their peak value of $367 in November 2021, dropping back to $129.17 at the close of trading on 14 February 2022.
While tech stocks have trended downwards since November, Sea Ltd’s fall is more significant than some of its peers. That could mean this is an opportunity to buy in the dip, but the company’s P/S ratio still makes the stock look expensive at its current price.
Sea Ltd’s strong revenue growth could make it an enticing investment opportunity, but investors should be aware they may be buying into an overpriced stock that has exhibited significant volatility. As such, this is only an investment for the ambitious.
