Is Sea Limited Stock a buy after its alarming earnings report?

Shares of Sea Limited (NYSE: SE) crashed and burned on Tuesday, plunging in the wake of its fourth-quarter financial report. The results, which appear robust at first glance, show that trouble is brewing just below the surface.

The company’s flagship mobile game — Free fire – was the catalyst that helped launch Sea Limited’s e-commerce and digital payments business, but the company expects a significant downturn in gaming over the coming year. Given these challenges, are shares of Sea Limited a buy or should investors look elsewhere?

The cornerstone of its strategy

Sea Limited evolved from a producer of mobile games, taking advantage of the explosive popularity of Free fire in a three-pronged enterprise. The company’s Garena video game segment is its only profitable business. Sea Limited used profits and cash flow from this unit to fund the growth of its e-commerce unit, Shopee, and its digital payments and fintech arm, Sea Money.

Image source: Getty Images.

Although its fourth-quarter results were mostly strong, one worrying trend has investors worried. Reservations are a common metric for gaming companies, representing sales of products and services that have not yet been recognized as revenue. After growing 117% year-over-year in the first quarter of last year, bookings have fallen significantly in every quarter since and have only increased 7% year-over-year in first trimester. This suggests players are finding other things to do with their time.

Management acknowledged the headwinds affecting its important gaming segment. “, noted management in prepared comments. The company went on to point out that Free fire is currently banned in India, although Sea Limited is currently appealing this decision, with the support of the Singapore government.

With that as a backdrop, management said they expect bookings decline 35% over the coming year. It’s a somewhat troubling development, as gaming is the fuel that sustains the rest of Sea Limited’s growth.

Although it is too early to sound the alarm bells, I will not increase my Sea Limited position until I see improvement in this extremely telling metric.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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