Consumer internet company Sea Limited (NYSE:SE) has been on a downward slope recently, falling from highs of around $370 in October 2021 to its current price of $130. This has been partly due to the general sell-off of growth stocks, on the back of issues like inflation and rising interest rates. Yesterday, the stock fell another 20%, as its flagship game Free Fire was banned in India. But I think this dip offers a great time for me to buy more Sea shares. Here’s why.
The recent ban
India has banned several apps that have ties to China, citing security concerns. Despite Sea being based in Singapore, it has close ties to Tencent, a Chinese company, and this meant that Free Fire was one of the apps banned. This is a risk for the company, because India was one of the biggest markets for the game.
Even so, I believe that the 20% fall yesterday was a market overreaction. Indeed, India only represents 3% of the gaming sector income for the company. Secondly, I believe there is a high chance that the ban will not last for long. This is because at the date of the ban, Tencent still held Class B shares with special voting shares. Nonetheless, it has since given up these special voting shares, meaning that it is now just an ordinary shareholder. Therefore, Sea’s ties with China are far more limited than it may seem. This will hopefully see the ban overturned, and the share price should be able to recover as a result.
Other factors
It also has far more growth prospects than just Free Fire, a factor I like to see in growth stocks. Indeed, using the profits generated from its gaming sector, it has launched Shopee, an e-commerce company operating around the world. Recently, Shopee has managed to expand into Latin America, Asia, and some parts of Europe. In the third quarter, revenues in the e-commerce sector were also able to reach $1.5bn, a 134% increase year-on-year. This was even higher than the company’s digital entertainment sector.
Such diversification also means that revenues for 2021 are likely to reach around $9bn, which is more than a 100% increase year-on-year. After the recent dip in the share price, this means that it trades at a price-to-sales ratio of around 8. Due to the company’s incredible rates of growth, this seems far too cheap. For example, in the past, it has traded at P/S ratios of around 30.
Of course, there is the risk that growth may slow in the future, especially as the effects of the pandemic start to wear off.
Will this growth stock recover?
In the short term, several issues continue to face the firm, and the recent ban in India is a reason to feel slightly cautious. Even so, in the long term, I’m far more confident. The growth stock has been expanding all around the world and is capturing multiple unpenetrated markets. Management has also proven adept. Therefore, I believe that this recent dip offers an ideal time to add more Sea shares to my portfolio.
Stuart Blair owns shares in Sea Limited. The Motley Fool UK has recommended Sea Limited. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
This post was originally published on Motley Fool
