Hold Sea Limited Stock Until Negative Headwinds Clear Up

Stock Market
  • Sea Limited (SE) is down substantially from 2021 highs after Tencent sold, then India banned its app
  • The chart suggests a bottom but fundamentals need to strengthen before a rebound
  • Investors should hold a small position for now
Source: Wirestock Creators / Shutterstock

During most of the second half of 2021, Sea Limited (NYSE:SE) stock traded at around $300. Dubbed an e-commerce giant of Asia and a metaverse play, SE stock looked like it would keep rising. Instead, investors failed to recognize major insider selling. Its spat with India also accelerated selling pressure.

Sea eventually bottomed at $85, rallying back to over $116 recently. On the stock chart, technical chart readers will predict that Sea’s downside ended. Unfortunately, charts only give investors a historical picture of the stock price. The Singapore-based firm has headwinds to overcome first before its share price stops falling.

SE Sea Limited $123.84

Insider Sold SE Stock

On Jan. 4, Chinese gaming and social media firm Tencent Holdings (OTCMKTS:TCEHY) sold a whopping 14.5 million shares for $208 each. After the stock closed at around $116, Tencent avoided nearly $100 a share, or $145 million, in losses. Neither Tencent nor Sea commented on the sale. Investors need to interpret the sale as short-term bearish but long-term bullish.

Tencent needed to raise $3 billion to shore up its cash balance. On March 23, 2022, Tencent posted revenue growing by only 8% in Q4. Core businesses are slowing. For example, Tencent Video increased its subscription by only 1% year-on-year to 124 million. Tencent is still the top video supplier in China. It has diversified content in animated series, sports, and drama series.

Tencent chose to raise its cash on hand by divesting some of its stake in SE stock. It still owns 18.7% of Sea, down from 21.3% before the Jan. 2022 sale.

Regulatory Headwinds from India

Rising tensions between India and China might have led to India abruptly banning Sea’s most popular mobile gaming title. Sea’s Free Fire game was the highest-grossing mobile game in India for Q3/2021, according to App Annie. India’s actions against the Singapore-based firm are unusual. The ban will not harm China-based firms.

Singapore’s ministry of trade and industry (MTI) hoped for an expeditious resolution. Fortunately, Sea will withstand the temporary ban. The game may lose some momentum in the near term. When India lifts the bank, players will return to the platform. In the interim, Tencent and Sea will continue working together to develop mobile games for worldwide distribution.

Fourth-Quarter Highlights

Chief Executive Officer Forrest Li said in the Q4/2021 press release that the company may leverage its growing scale and market leadership. It will realize growth by leveraging its efficiencies across its ecosystem. Furthermore, Sea will reach profitability on more markets in 2022.

Shopee, Sea’s e-commerce division, will reach positive adjusted EBITDA this year. That forecast excludes its headquarter cost allocation in Southeast Asia and Taiwan. By 2025, Sea’s management believes Shopee and SeaMoney’s cash flow from operations will self-fund their growth.

In the fourth quarter, Sea reported GAAP revenue growing by 105.7% to $3.2 billion. Total adjusted EBITDA was a negative $492.1 million, compared to a positive $48.7 million in Q4/2020. Revenue from Sea’s digital entertainment grew by 104.1% Y/Y to $1.4 billion. Cautious investors will notice bookings rising by 6.8% Y/Y to $1.1 billion. Paying users grew by 5.6% Y/Y to 77.2 million.

The average bookings per user were $1.7. This has the potential to rise in the coming months. The Free Fire hit game needs to hold its top global rankings, as measured by the user and gross metrics. Sea held the most downloaded mobile game title for three consecutive years.

What Investors Should Do From Here

Investors who accumulate SE stock at every dip will lower their average price per share. The risk of this strategy is the total loss will increase if the stock price keeps falling. Instead of averaging down, investors should wait for Nasdaq’s reversal first. After Nasdaq bottomed in mid-March, traders will argue that Nasdaq already reversed.

This is not true.

Nasdaq rallied because the Federal Reserve failed to increase interest rates by a meaningful amount. The 25 basis point hike only acted as a warning signal. In May 2022, the Fed will re-assess inflation figures. Excluding war-driven inflation, inflation due to permanently higher wages and energy costs will drive Nasdaq valuations lower. This will pressure Sea’s stock price.

Hold a small position in Sea stock for now.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.

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