Sea Limited's (SE 0.03%) stock hit an all-time high of $366.99 last October, representing a 2,347% gain from its initial public offering just four years earlier.
But over the past five months, the Singapore-based gaming and e-commerce company's shares were cut in half as investors fretted over its slowing growth, widening losses, and the abrupt ban of its hit mobile game Free Fire in India. Other macro headwinds, including inflation and rising interest rates, exacerbated that pain by punishing pricier growth stocks.
Sea's fourth-quarter earnings report in early March, which spooked investors with a sea of red ink and the slowing growth of its Garena gaming unit, caused its stock to sink to a 52-week low of $85.01 two weeks later.
The stock now trades around $120, but it remains a polarizing investment. Let's review a new green flag for the bulls and a new red flag for the bears -- and see if they will tilt the scales in favor of either camp.
The green flag: Shopee's exit from India
Sea launched its e-commerce platform Shopee in India last November. At the time, the market's reaction was broadly negative for three reasons.
First, many other platforms -- including Walmart's Flipkart, Amazon India, Snapdeal, and Myntra -- had already entrenched themselves in the Indian market. Carving out a niche in that saturated environment would be costly and cause Shopee to rack up much wider losses per order with its loss-leading promotions.
Second, expanding into India seems too aggressive since Shopee still hasn't broken even in its core Southeast Asian and Taiwanese markets yet. Investing in India could also divert resources away from its aggressive push into Latin America to challenge MercadoLibre.
Lastly, Indian regulators have been trying to throttle the growth of Walmart, Amazon, and other foreign-owned e-commerce marketplaces with new restrictions to foster the growth of its own domestic competitors. That protectionism could create a hostile environment for Shopee.
That's why Sea Limited's recent shutdown of Shopee India, which it attributes to "market uncertainties," is a green flag. It might just seem like a response to India's ban on Free Fire -- which was likely related to Tencent Holdings' stake in Sea and India's broader ban on Chinese apps -- but it could help Sea save a lot of cash and avert a future disaster.
Shopee also previously shut down its short-lived French marketplace in February. These two back-to-back shutdowns indicate it's wisely reining in its resources to focus on Southeast Asia, Taiwan, and Latin America.
The red flag: Brewing troubles in Taiwan
Unfortunately, Sea still faces potential challenges in Taiwan. In March, Taiwan's Economic Democracy Union urged the government to regulate Shopee to deter China's economic influence in Taiwan.
The think tank claims Tencent's stake in Sea represents a loophole that allows Chinese companies to bypass Taiwanese investment restrictions against China. It also wants Shopee to open up its platform to third-party digital payment services in Taiwan and launch more fraud-prevention measures for consumers. Other civic groups have also accused Shopee of attempting to monopolize Taiwan's e-commerce, digital payments, and logistics markets.
Sea doesn't disclose its revenue from Taiwan separately, but it noted that Shopee was the country's most popular shopping app in terms of monthly active users and total time spent on the app (according to data.ai) in 2021. It also lists Taiwan as one of its seven core markets along with Indonesia, Vietnam, Thailand, the Philippines, Malaysia, and Singapore.
It's unclear if the Taiwanese government will actually rein in Shopee with new regulations. But if that happens, the growth of Shopee's e-commerce business could slow down significantly.
Which recent development matters more?
I believe Shopee's exit from India matters a lot more than the regulatory rumblings in Taiwan. Leaving India will enable Sea to focus on strengthening its core markets while accelerating its push into Latin America, but the recent debates in Taiwan probably won't escalate into heavy-handed crackdowns. Singapore is one of Taiwan's largest trading partners, and blacklisting one of the city-state's top tech companies could harm that key relationship.
Sea's outlook now looks a bit brighter than it did at the beginning of the year, but it still needs to stabilize its losses and roll out new games for Garena to be considered a promising growth stock again.