Shares of Sea Limited (SE 0.03%) sank 12.6% this week, according to data from S&P Global Market Intelligence. The southeast Asian technology giant, which has exposure to the mobile gaming, e-commerce, and financial technology industries, saw investors sell off its stock after the U.S. reported high inflation for the month of June and a poor mobile games report released by Sensor Tower. As of this writing, shares of Sea Limited are down 70% year to date (YTD).
Inflation in the United States came in hotter than expected in June, at a 9.1% year-over-year growth rate. With inflation running so rampant, it is likely the Federal Reserve will need to continue to raise interest rates more aggressively. When this happens, stocks generally go down because investors can get higher yields from safer financial instruments like treasury bonds. Market participants generally seem to be banking on this happening right now, which likely caused them to sell off their shares of Sea Limited.
What's more, Sensor Tower released a report on the mobile gaming industry for the first half of 2022. Through its Garena division and its Free Fire game, Sea Limited has a lot of exposure to this market. In the first half of 2022, Sensor Tower estimates that spending on mobile gaming declined 6.6% year over year to $41.2 billion.
Looking at Free Fire specifically, the game was outside the top 10 of games for overall revenue in the period, losing out to favorites like PUBG Mobile and Candy Crush. Free Fire was fifth-ranked revenue-wise on Alphabet's Google Play store, which makes sense because of its popularity in countries where Android (a property of Google) has a huge market share lead over Apple. Either way, being outside the top 10 in overall spending is not a good sign, especially when Sea Limited already reported that Garena's bookings were down in the first quarter of 2022. Investors were likely not happy to see this news.
With the stock down so much, Sea Limited now trades at a market cap of $38 billion and a trailing price-to-gross profit (P/GP) ratio of 8.6. The company is not profitable, but that is because management is pouring all of its resources into growth. Currently, this growth looks fantastic, with gross profit up around 150% in the last 12 months.
At a discounted price, now could be a good time to swoop in and buy some shares of Sea Limited if you think this high gross profit growth is sustainable. Eventually, it should translate to net profits and cash flow.