Sea Limited (SE 0.03%) has made numerous headlines over the past few months, and not in a good way. Here are just a few things that have hurt the Singapore-based company in 2022:
- The Chinese company Tencent reduced its ownership stake.
- The Indian government banned its hit mobile video game Free Fire.
- The company announced it is pulling its e-commerce company, Shopee, out of both India and France.
This is not an extensive list of all the news coming out of Sea Limited, but it shows that investors have been faced with a slew of negative news. In addition to the broader growth stock sell-off, these events caused shares of Sea to fall 66% from their all-time highs set in October 2021.
While this company might seem like a lost cause right now, there are a few reasons to be hopeful. Here are three things that investors need to know about this fast-growing super-app.
1. Volatility will likely continue
The events I noted above were not the only reasons the company has taken a tumble as of late. Sea noted in its fourth-quarter report that its Free Fire bookings are expected to tumble. The company is guiding for full-year 2022 bookings of $3 billion, which would be a steep decline from that company's 2021 result of $4.6 billion.
This is likely because of Free Fire's waning popularity. It has been one of the world's most popular video games, and it was even the most downloaded mobile game in the world in 2021. However, no game remains on top forever, and Sea Limited could be seeing the beginning of an understandable decline.
When you combine this with the fact that Shopee is pulling out of countries that investors had high hopes for and sprinkle in a little geopolitical uncertainty with its connections to China, it's easy to see why Sea has fallen so much.
That being said, this might not be the end of this volatile story. The effects of Sea's connection to China are still up in the air. Sea Limited is not from China, but Tencent's 19% ownership as of January 2022 does make it susceptible to the risks of that association.
Despite these uncertainties, investors should be invigorated to see Sea Limited trading at the price it is today. The company is on a trajectory to continue growing at rapid rates over the next few years.
2. Gaming is becoming less important
One consequence of the decline in Sea's gaming revenue is that the company's profitability will likely sink as well. Its gaming business is the only profitable segment on an adjusted EBITDA basis, so the decline in growth for this segment could cause profitability to fall off a cliff.
Still, management noted that this issue will become less concerning going forward. Shopee is on track to achieve positive adjusted EBITDA (excluding headquarters' expenses) this year in Southeast Asia and Taiwan. Additionally, SeaMoney -- the company's fintech offering -- is expected to be cash flow positive in 2023. While there are plenty of caveats and adjustments being made with those metrics, they indicate a general trend toward profitability for Sea.
This trend is critical. Not only would it lessen Sea's reliance on its gaming business' profitability, but it could also result in Shopee and SeaMoney becoming self-funding. If this happens, the company could continue spending plenty of money to extend the growth life of these segments.
3. Sea Limited is just getting started
The growth that SeaMoney and Shopee have posted over the past few quarters has been impressive; yet, both segments still have room to grow. Shopee is expecting revenue to jump 76% year over year in 2022, and that is on top of its 136% top-line improvement in 2021. While it might not be expanding into France or India, it still has its hands in new markets. Shopee recently announced a launch into Spain and Poland -- its first major entrances into Europe. If Shopee is successful there, that could mean persistent success.
SeaMoney is another reason to be optimistic. It grew revenue by 711% year over year in Q4 to $197.5 million, and its quarterly active-user count reached nearly 46 million. The population of Indonesia is over 278 million, so the potential in that region alone could result in SeaMoney's success there, not to mention the rest of Southeast Asia.
Despite all of the seemingly bad news, now could be a good buying opportunity for long-term investors. The potential for SeaMoney and Shopee is still massive, even after the failures in France and India. The company's trend toward profitability is also a green flag, and while this needs to be monitored, it should keep investors optimistic.
Shares are trading at just 6.6 times sales -- a valuation that Sea has traded at just one other time during its entire life as a public company. Because of this dichotomy between price and opportunity, it might be worthwhile to pick up shares today.