Sea Limited (SE 0.05%) surged almost 20% higher in recent trading sessions following some news out of Indonesia. That country's government banned social media companies from selling online. This hurts TikTok Shop, which competed directly with Sea Limited's Shopee platform.
Unfortunately, a recovery that began last November reversed itself amid slowing e-commerce growth and the massive decline in revenue at its gaming segment, Garena.
Additionally, Sea Limited lost almost 90% of its value after the stock experienced a massive surge in 2020 and 2021. Such price action understandably leaves investors questioning whether Sea Limited can begin to recover or if investors are in for another wild ride.
The state of Sea Limited
Admittedly, the news from Indonesia might have been the excuse investors wanted to see. At more than 275 million, Indonesia is Shopee's most populous market, so less competition is a huge boost to the company. Also, the stock has fallen by about 50% since May as the effects of the declines at Garena and slowing online sales started to take their toll on Sea Limited.
Indeed, Garena's revenue in the second quarter fell 41% over the last year. So bad was this drop that the 20% revenue increase for Shopee and the 53% rise in its fintech segment, SeaMoney, over the same period could not help the company gain traction.
Moreover, its performance over the last year may make some investors wary of trusting a rally. Its ultimately successful move to turn profitable took Sea Limited stock from a low of $41 per share to a high of almost $89 the following May. The aforementioned revenue struggles fully reversed that gain.
Sea Limited going forward
However, investors may have good reason to believe a rally may hold this time. Unlike one year ago, the company is profitable, with Sea reporting a positive net income in each of the last three quarters.
Furthermore, the news goes well beyond less competition in Indonesia. Last month, the company received approval from the Indian government to release an approved version of its battle royale game, Free Fire.
India banned the game in early 2022, a factor that likely contributed to the stock's drop during that time. Free Fire being available in the world's most populous country is likely the catalyst Garena needs to reverse its massive revenue declines.
Additionally, between the profits and the massive swoon in the stock price, its forward price-to-earnings ratio stands at 20. Among e-commerce conglomerates, only Alibaba sells at a lower valuation. Since Sea does not face Alibaba's geopolitical challenges, this factor could make Sea Limited one of the better buys in e-commerce.
Trading Sea Limited stock
Given Sea Limited's current market state, the TikTok news is probably a good reason to buy shares. Indeed, bear markets in the entertainment stock foster doubts among investors.
Nonetheless, at a forward P/E of 20, the stock is probably oversold. Sea is profitable, and two of its three segments are increasing revenue by at least 20%. Moreover, with Free Fire making a comeback in India, the worst could be over for Garena, giving investors another compelling reason to consider Sea Limited stock.
