Sea Limited's (SE -0.74%) stock price has declined more than 60% since it hit a record high of $372.70 per share last October. The Singapore-based tech giant -- which owns the e-commerce platform Shopee and the gaming company Garena -- struggled with concerns about its decelerating growth, rising expenses, and its debt-fueled expansion into overseas markets.

Sea remains a divisive stock. The bulls believe it's well-poised to capitalize on rising e-commerce penetration rates in Southeast Asia, Latin America, and other emerging markets. They also believe Garena's top game, Free Fire, will continue to lock in gamers and offset Shopee's losses. The bears believe its overseas expansion is costly and reckless, that Free Fire will lose its momentum, and that its long-term growth forecasts are unsustainable.

A person plays a mobile game on a smartphone.

Image source: Getty Images.

Over the past week, a red flag and green flag both appeared on the horizon for Sea's investors. Let's examine these latest developments and see if they tilt the scales in favor of the bears or the bulls.

The red flag: India's ban on Free Fire

On Feb. 15, Indian regulators banned 54 mobile apps, most of which were Chinese, over national security concerns. Free Fire was also included on the list, even though Garena is based in Singapore.

India's latest ban increases its number of banned apps to 321. The country's regulators started banning popular Chinese apps -- including ByteDance's TikTok and Tencent's (TCEHY 1.09%) PUBG Mobile -- in 2020 after a border clash with China sparked an escalation in political tensions.

The ban on Free Fire is likely related to Tencent's stake in Sea, which the company reduced from 21.3% to 18.7% in January. That stake could still be too high for Indian regulators to accept, since Tencent is one of China's top tech companies and owns WeChat, the country's most popular mobile messaging platform with over 1.2 billion monthly active users.

Sea doesn't disclose its revenue in India separately, but Bloomberg Intelligence and Sensor Tower estimate it generated about 3% of its mobile gaming revenues in the country last year. App Annie also rated Free Fire as India's highest-grossing game in the third quarter of 2021.

The loss of India wouldn't be disastrous for Free Fire, which remains tremendously popular in Southeast Asia, Latin America, and other regions. However, the ban on Free Fire raises troubling questions about Shopee's recent expansion into India. A government ban on Shopee could abruptly end those fledgling e-commerce efforts before they gain any traction against larger players like Walmart's Flipkart and Amazon.

Some of Sea's investors might applaud a forced retreat, since the expansion of Shopee India could result in some staggering losses. But other investors might consider it to be a major lost opportunity, since Sea has already proven that it can successfully leverage the popularity of Free Fire to support Shopee's expansion into a new region with its success in Latin America.

The green flag: Cathie Wood gets interested in Sea

Sea's stock swooned after India's ban on Free Fire, but Ark Invest's Cathie Wood added another 150,000 shares of Sea to the Ark Next Generation Internet (ARKW 3.17%) and Ark Fintech Innovation (ARKF 2.77%) exchange-traded funds (ETFs) on the same day.

As of Feb.17, Sea accounts for 2.98% of Ark's Next Generation ETF and 4.86% of Ark's Fintech Innovation ETF. Together, the two ETFs hold 1.12 million of shares of Sea with a market value of about $158.2 million.

Wood's bullishness on Sea is encouraging, but investors should also note that both ETFs broadly underperformed the market over the past 12 months:

ARKW Chart

Data source: YCharts.

Both ETFs were crushed as rising interest rates sparked a rotation from Ark's top growth stocks toward value stocks. Wood also liquidated many of her top picks, including DocuSign and Skillz, after their prices plunged.

The bulls probably see Ark's vote of confidence as a sign of Sea's disruptive potential across the gaming, e-commerce, and fintech markets. However, the bears probably see it as just another hasty attempt by Ark to find a new pocket of short-term growth in this challenging market.

Which flag is more important?

I personally own some shares of Sea, and I remain confident in its long-term prospects. However, the news about Free Fire in India is clearly more significant than Cathie Wood's latest buying spree.

The ban on Free Fire in India could cause Tencent to further reduce its stake in Sea, for Shopee to also be banned in India, and for Sea to rethink its other overseas strategies. Therefore, investors should keep a much closer eye on its recent challenges in India than Ark's latest purchases.