Shares of Sea Limited (SE -3.07%) had a tough day on Monday. After cratering as much as 19.7%, the stock ended the trading day down 18.4%.
Investors learned today that India had plans to ban the company's marquee mobile game -- Free Fire -- along with a number of other apps said to have ties to China, citing security concerns. Given the situation and the tremendous haircut it was given today, is Sea Limited stock a buy?
Context is important
It's understandable that investors might have something of a new-jerk reaction to todays news. Over the past several years, the company has been introducing Free Fire to gamers in a number of new regions, including India and Latin America. Once the game has a foothold, Sea Limited introduces Shopee -- its e-commerce platform -- and Sea Money, its digital payments solution, employing something of a land-and-expand strategy.
A look at Sea Limited's recent results illustrates the success of that strategy. In the 2021 third quarter, revenue of $2.7 billion ballooned 122% year over year, while its gross profit of $1 billion surged 148%. Of that total, the digital entertainment (gaming) segment accounted for $1.1 billion, while e-commerce generated $1.3 billion accounting for the lion's share of Sea Limited's revenue.
However, India represented less than 3% of Sea's gaming revenue, or roughly $33 million, or roughly 1.2% of total sales.
But is it a buy?
While Sea Limited's revenue is growing like wildfire (or Free Fire, as the case may be), the company is far from profitable. It generated a net loss of $571 million in Q3, but the news isn't as bad as it might seem at first glance. The tech giant generated operating cash flow of $513 million during the quarter, suggesting that non-cash expenses including depreciation account for the bulk of its losses.
This is a high-growth, high volatility stock that is by no means cheap. It has a valuation of 9 times trailing sales, when a reasonable price-to-sales ratio is generally considered to be between 1 and 2. However, given Sea Limited's stunning growth rate and vast opportunity, investors with a stomach for volatility should consider getting shares at a discount.