What happened
Shares of Southeast Asia's leading e-commerce company, Sea Limited (SE 4.34%), were down 6% as of 3:40 p.m. ET today. It was a rough day overall for the market. The Nasdaq Composite was down 3.5%, reflecting continued weakness for growth stocks on mounting fears of Federal Reserve action and a coming slowdown in economic growth.
Sea's stock is now down 76% from all-time highs reached in autumn of 2021.
Image source: Getty Images.
So what
There was no news from Sea that caused today's decline. Rather, the market overall is still digesting comments from Fed chair Jerome Powell last week, specifically that an interest rate hike of 50 basis points was on the table during the May meeting.
Higher interest rates lower the present value of stocks, especially those of high-growth but richly valued companies like Sea. Even after the steep tumble in recent months, Sea shares trade for 4.5 times sales and 340 times free cash flow. The latter metric is so rich because Sea is choosing to funnel its profits back into expansion of its Shopee e-commerce app.
Now what
Some investors have soured on Sea's e-commerce strategy. Shopee isn't profitable yet, and the company is making a push into new markets in Europe and South America outside of its home turf in Southeast Asia. Funding this expansion is Sea's highly profitable video game segment, led by the hit title Free Fire.
But even Free Fire is coming under some pressure now, too. After years of fast growth for this international favorite, a fresh new game title might benefit Sea. Plus, India banned Free Fire along with apps having Chinese origin, even though Sea is based in Singapore. The likely reason is that Chinese tech giant Tencent (TCEHY 3.56%) is a large shareholder of Sea. Citing global economic uncertainty, Sea also shut down Shopee in India earlier this year.
Management has said to expect bookings (revenue plus deferred revenue) for its video gaming entertainment segment to be $3 billion in 2022, down from $4.3 billion last year. E-commerce sales are expected to increase 76% to $9 billion, and digital finance revenue is expected to increase 155% to $1.2 billion at the midpoint of guidance. In spite of recent worries, Sea is hardly a slouch in the growth department.
