Can the Sea share price turn the tide following India’s Free Fire ban?

The Sea share price slumped after the news of India’s ban on apps with links to China, including its popular Free Fire game. Though there are concerns that further regulatory changes may follow, analysts still see Sea as a buy.

India’s home ministry banned 54 mobile apps from firms based in China or with links to the country. On the list was the popular battle royale game Free Fire, published by Garena, a brand owned by Singapore-based company Sea [SE].

The sudden move to pull the Free Fire game from Apple’s [AAPL] App Store and the Google [GOOGL] Play store wiped $16bn off Sea’s valuation after the news was announced on Monday 14 February. It marked its biggest daily drop since its IPO in October 2017. The Sea share price closed the trading week 8% lower and was down 46.1% year-to-date at the close on 23 February.

India is an increasingly important market

India is the world’s largest market by smartphone game downloads, according to Data.ai (formerly App Annie). The mobile data and analytics platform’s ‘2021 Mobile Gaming Tear Down’ report shows that Garena’s Free Fire was the top game in the country by consumer spend in the first half of 2021.

According to mobile app intelligence firm Sensor Tower, Free Fire was the most downloaded game worldwide in January. It accounted for 24 million installs, a 51.6% year-over-year increase. Smartphone users in India made up 25.5% of total downloads of the game.

Data.ai has attributed Garena’s growing popularity to clever moves it has made to ramp up engagement, namely a partnership with the footballer Cristiano Ronaldo in December 2020. “By integrating Ronaldo into the game, Garena increased player engagement and ‘buzz’ around the title — certainly a booster for any user acquisition effort,” the company noted in its 2021 report.

Interestingly, while India has banned Free Fire, it hasn’t pulled Free Fire MAX, the premium version of the game that delivers a higher quality gameplay experience and is designed for next-generation devices. Speaking on its third-quarter earnings call in November 2021, Sea chairman and CEO Forrest Li said that MAX drives more engagement.

If MAX isn’t taken off smartphone stores, then this could potentially end up being good news for Sea. The Free Fire ban could push users to download the premium version and the increased engagement MAX offers could theoretically lead to more in-app purchases and increased bookings for the company.

Regulatory concerns persist amid increasing competition

Although the Free Fire may not end up being a big revenue killer, there are concerns that the ban could eventually extend to the ecommerce app Shopee. This could explain the recent sell-off and pullback in the Sea share price.

Shopee launched in India towards the end of 2021 and, by December, more than 20,000 merchants had been signed up, according to Money Control, one of India’s leading financial news sources. The publication also revealed that the platform was clocking around 1,000 orders a day in its first few weeks.

Although Shopee’s penetration into India’s ecommerce market is only at an early stage, if the country’s home ministry were to cut off this revenue stream then it would only emphasise the geopolitical challenges that Chinese-linked companies are facing.

Sea’s biggest shareholder is Tencent [HK:700]. In January, the social media giant announced it had reduced its stake from 21.3% to 18.7%, with its voting power falling below 10%. It intends to retain its majority holding for the long term.

Even if the move can be viewed as good news for Sea because Tencent will have less influence, investors are still likely to be concerned about the increasing competition facing Shopee in southeast Asia.

Shopee might be the dominant ecommerce player in the region; Lazada is second. Its parent company Alibaba [BABA] has big plans for the platform and in December revealed it was targeting annual global merchandise volume (GMV) of $100bn. In the year ended September 2021, its GMV was $21bn. Shopee’s GMV for Q3 2021 was $16.8bn.

ARK snapped up Sea stocks

Despite the increased competition, in what is perhaps a sign of confidence in the stock’s potential to rise from its current level, Cathie Wood snapped up just over 146,000 Sea shares following the selloff on 14 February — 97,786 were added to ARK Next Generation Internet [ARKW] and 48,876 to ARK Fintech Innovation [ARKF]. On 18 February 40,384 shares were added to ARK Innovation [ARKK] and a further 37,001 were bought by ARKF on 22 February.

In a note following the news of the Chinese app ban, Stifel analyst Scott Devitt said that he expects the change will have a mid-single digit impact on Garena’s bookings. Devitt also pointed out that some apps that have previously been banned in India have later returned in some form. He maintains a ‘buy’ rating and $300 price target on the stock, according to The Fly.