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Why Shares of Sea Limited Tanked 8% Today

By Nicholas Rossolillo – Jan 13, 2022 at 1:56PM

Key Points

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Some investors are pessimistic about the company's global expansion plans.

What happened

Shares of southeast Asia e-commerce and video game giant Sea Limited (SE 7.74%) were down 8% today as of 1:30 p.m. ET. It deepens the sell-off the stock has suffered since October when Sea reached its all-time high. Shares have now been nearly halved in value since then.  

Someone using a smartphone. A  city skyline is in the background.

Image source: Getty Images.

So what

Sea has been using its highly profitable video game segment (publisher Garena, responsible for the international hit Free Fire) to invest in its e-commerce app Shopee. This e-commerce segment is growing at a triple-digit percentage rate but highly unprofitable at this point, and Sea is entering new markets at a rapid pace -- including Latin America, Poland, Spain, and India.  

As for India, it's a massive emerging market where Sea already has millions of Free Fire fans. The company thinks it can use its game to market its shopping services and carve out a niche for itself. However, it's also a very competitive e-commerce space that includes Lazada (an Alibaba subsidiary), Flipkart (backed by Walmart), Amazon, and others. Some investors aren't thrilled at the prospect of Sea opening up new fronts in so many new markets all at once and have been heading for the exit.  

Now what

Sea prioritizing sales growth instead of profitability, even though it's now a massive company with a market cap of $103 billion as of this writing, simply isn't going to sit well with many investors. Selling pressure is taking its toll on the stock at the moment, and major shareholder Tencent (TCEHY 6.88%) reducing its stake from about 21% to 18% in Sea (announced last week) isn't helping.  

Nevertheless, it's important to remember that Sea actually can afford to spend heavily right now, sacrificing profit now for a bigger payoff later. Despite its spending frenzy to launch its e-commerce capabilities in new markets, the company actually generated $342 million in free cash flow over the last 12 months thanks to Free Fire. While an aggressive company like this certainly isn't for everyone, Sea still has massive potential over the long term.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own Sea Limited. The Motley Fool owns and recommends Amazon, Sea Limited, and Tencent Holdings. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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