First reason SEA stock is bearish: Garena's slowdown
Sea generated 31% of its revenue from the digital entertainment division, which houses its gaming unit Garena, in its latest quarter. Garena generates most of its growth from its battle royale game Free Fire, which was launched back in 2017.
Garena's bookings soared 80% in 2020 as more people played Free Fire throughout the pandemic, then increased 44% in 2021. But its bookings declined sharply in the first half of 2022 as those pandemic-induced headwinds faded away. The game was also abruptly banned in India, one of its fastest-growing markets, earlier this year.
Second reason : It's (SEA) ongoing losses
Garena's slowdown is troubling because it's the only one of Sea's three main businesses units that generates a positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). Shopee is still racking up losses as it tries to attract shoppers with discounts and shipping subsidies, and it's also operating SeaMoney at a loss to lock in more users.
The bulls initially believed Sea could offset those losses with Garena's profits, but that thesis is quickly collapsing as Free Fire's growth stalls out. That's why analysts expect Sea to remain unprofitable for the foreseeable future.
Third reason that SEA stock is bearish : Rising interest rates
Sea's lack of profits will make it an unappealing investment as long as interest rates continue to rise. It was still sitting on $6.5 billion in cash and equivalents at the end of the second quarter, thanks to a big debt and stock sale last year, but it could struggle to raise more funds at favorable rates in this challenging market.
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