Shares of Sea Limited (SE -0.18%) crashed and burned on Tuesday, plunging in the wake of its fourth-quarter financial report. The results, which appear robust at first glance, show that trouble is brewing just beneath the surface.
The company's marquee mobile game -- Free Fire -- was the catalyst that helped launch Sea Limited's e-commerce and digital payments businesses, but the company is expecting a significant slowdown in gaming over the coming year. Given these challenges, is Sea Limited stock a buy, or should investors look elsewhere?
The linchpin of its strategy
Sea Limited has evolved from a mobile game producer, parlaying the explosive popularity of Free Fire into a three-pronged business. The company's Garena video game segment is its only profitable business. Sea Limited has used the profits and cash flow from this unit to finance the growth of its e-commerce unit, Shopee, and its digital payments and fintech arm, Sea Money.
Image source: Getty Images.
While its fourth-quarter results were mostly strong, there was a troubling trend that worried investors. Bookings is a common measure for gaming companies, which accounts for the sales of products and services that have not yet been recognized as revenue. After increasing 117% year over year in the first quarter of last year, bookings have trended significantly lower in every quarter since, and are up just 7% year over year in the first quarter. This suggests that gamers are finding other things to do with their time.
Management acknowledged the headwinds impacting its important gaming segment. "With many economies reopening further in the fourth quarter and into this year, we have observed some moderation in online activities and fluctuations in user engagement," management noted in prepared comments. The company went on to point out that Free Fire is currently banned in India, though Sea Limited is currently appealing that decision, with the backing of the Singapore government.
With that as a backdrop, management said it expects bookings to decline 35% over the coming year. This is a somewhat troubling development, as gaming is the fuel that supports the rest of Sea Limited's growth.
While it's too early to sound the alarm, I won't be adding to my Sea Limited position until I see improvement in this extremely telling metric.
