Sea Limited's (SE -0.76%) stock plummeted nearly 80% this year and surrendered all of its gains from the past two and half a years. The Singapore-based e-commerce, fintech, and gaming giant lost its luster as its top line growth cooled off and its losses widened. Rising interest rates exacerbated the pain by broadly crushing higher-growth tech stocks.

But even after that painful drawdown, Sea's stock still remains about 240% above its IPO price of $15 from five years ago. Let's review the three reasons to buy Sea's stock -- along with three reasons to sell it -- to see where it might be headed.

An online merchant prepares an order.

Image source: Getty Images.

First reason to buy: Shopee's growth potential

Sea generated 59% of its revenues from Shopee, the leading e-commerce platform in Southeast Asia and Taiwan, in its latest quarter. Shopee's revenue surged 160% in 2020, driven by a spike in online purchases during the pandemic, and grew 136% in 2021. In 2022, it revenue rose 64% year over year in the first quarter and 51% in the second quarter. Its growth is gradually cooling off, but it's still growing a lot faster than most other major e-commerce companies.

Shopee scaled back its overseas expansion over the past year, but its core Southeast Asian market still has plenty of room to grow. IDC Financial Insights expects the region's number of e-commerce users to rise from 222 million in 2020 to 411 million in 2025. Bain & Company believes the GMV (gross merchandise volume, or the value of all goods sold) across the Southeast Asian e-commerce market will nearly double from $120 billion in 2021 to $234 billion in 2025. Those rosy forecasts suggest Shopee can easily generate high double-digit sales growth for the foreseeable future.

Second reason to buy: SeaMoney's growth potential

Sea generated another 9% of its revenue from its digital financial services (DFS) segment, which houses its SeaMoney digital wallet and other fintech services, in its latest quarter. It started disclosing the segment's revenues separately in 2021, when its revenue skyrocketed 711%.

Its DFS revenue rose 360% year over year in the first quarter of 2022, then grew another 214% in the second quarter. SeaMoney ended the second quarter with 52.7 million quarterly active users across all its services, which represented 53% growth from the previous year. That growth makes it a promising play on the expansion of Southeast Asia's digital wallet market, which IDC believes will grow from 154 million users in 2020 to 404 million users by 2025.

Third reason to buy: Its valuation

Sea's total revenue rose 101% in 2020 and 128% in 2021, and analysts expect its top line to grow at a CAGR (compound annual growth rate) of 24% from 2021 to 2024 -- which implies its annual revenue will nearly double.

Yet Sea's stock still trades at less than two times this year's sales, which makes it more comparable to a struggling brick-and-mortar retailer like GameStop instead of a high-growth e-commerce company. Therefore, it could easily double or triple from these levels if it finally impresses the market again. 

First reason to sell: Garena's slowdown

Sea generated 31% of its revenue from the digital entertainment division, which houses its gaming unit Garena, in its latest quarter. Garena generates most of its growth from its battle royale game Free Fire, which was launched back in 2017.

Garena's bookings soared 80% in 2020 as more people played Free Fire throughout the pandemic, then increased 44% in 2021. But its bookings declined sharply in the first half of 2022 as those pandemic-induced headwinds faded away. The game was also abruptly banned in India, one of its fastest-growing markets, earlier this year.

Second reason to sell: Its ongoing losses

Garena's slowdown is troubling because it's the only one of Sea's three main businesses units that generates a positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). Shopee is still racking up losses as it tries to attract shoppers with discounts and shipping subsidies, and it's also operating SeaMoney at a loss to lock in more users.

The bulls initially believed Sea could offset those losses with Garena's profits, but that thesis is quickly collapsing as Free Fire's growth stalls out. That's why analysts expect Sea to remain unprofitable for the foreseeable future.  

Third reason to sell: Rising interest rates

Sea's lack of profits will make it an unappealing investment as long as interest rates continue to rise. It was still sitting on $6.5 billion in cash and equivalents at the end of the second quarter, thanks to a big debt and stock sale last year, but it could struggle to raise more funds at favorable rates in this challenging market. 

Do its strengths outweigh its weaknesses?

I own some shares of Sea, and I believe its low price-to-sales ratio could limit its downside potential. But I also don't think it will stage a meaningful recovery until it revives Garena and narrows its losses. Sea might still generate multibagger gains over the long term as the Southeast Asian e-commerce and fintech markets expand, but its stock will remain out of favor until interest rates stabilize and the bulls rush back toward the riskier growth plays.