Sea Limited (SE) investors’ week got off to the worst possible start. Shares have been taking a hammering over the past 6 months, but Monday’s poor action took the biscuit. The stock fell by 18% after it became known India has banned 54 mobile apps – with the majority originating from China – citing security concerns as the reason for blocking access.
How does this affect SE? The company’s flagship game Free Fire is amongst the titles banned.
Somewhat ironically, Free Fire’s rapid growth in India – according to App Annie, in 3Q21, it was the country’s highest grossing mobile game – followed the ban of competing game PUBG, which was amongst the first wave of banning casualties; since June 2020, India has now banned more than 200 apps.
While Free Fire’s largest market remains Latam, Morgan Stanley’s Mark Goodridge estimates the Indian market is amongst the top 3, accounting for ~10% of 2021’s bookings – around US$475 million.
Although the app got deleted on February 12, if it has already been downloaded, users will still be able to play.
“This means SE can still generate revenue from players near term but will be unable to provide any updates (usually 1x per month), which will reduce its ability to continue to engage players and generate revenue,” Goodridge explained.
The earnings impact can also be mitigated somewhat by the fact that the high spec version FreeFire Max is still available on Google Play. As such, over the next few months, SE should be able to migrate its Free Fire players to Max.
However, there are still some unknowns to consider. Due the ongoing banning efforts, will Free Fire Max join the ban list? Or maybe there is the possibility of an appeal, given SE is a Singapore company (with a Chinese investor in Tencent). And what about Shopee which just launched in India, will that be banned too?
That remains to be seen. For now, Goodridge reiterated an Overweight (i.e., Buy) rating and sticks to a $225 price target. Investors will be sitting on returns of ~63%, should the analyst’s thesis prove correct over the next 12 months. (To watch Goodridge’s track record, click here)
The rest of the Street backs MS’s stance. Barring 1 Hold, all 6 other recent reviews are positive, culminating in a Strong Buy consensus rating. The average price target is even more bullish than Goodridge will allow; at $269.50, the stock is expected to trade at ~96% premium a year from now. (See Sea stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
