Shares of e-commerce stars Shopify (STORE -9.14%), MercadoLibre (MELI -6.87%)and Sea Limited (SE -6.21%) were each down significantly in early trading Monday, down 8.2%, 6.3% and 7%, respectively, as of 12:40 a.m. EDT.
The tech-heavy Nasdaq Composite was also down, but these e-commerce names were down much more, likely in preparation for this week’s inflation report and what could be a brutal second-quarter earnings season. for e-commerce in general.
The June inflation report on the May consumer price index was a catalyst for the market to drop another leg last month, so it looks like investors are nervous about this week’s report. , which is to be released on Wednesday morning. We’re also getting closer to earnings season – when these three e-commerce companies will face plenty of headwinds.
The second quarter saw inflation climb more than expected, with oil and food prices high for most of the quarter until a pullback in commodities at the end of June. This inflationary pressure could eat away at the cost structures of these companies while giving customers less discretionary income to purchase goods online.
Not only that, but the second quarter will also overlap with the last quarter, before the vaccines had been widely distributed to a large part of the population. This means that the second quarter of 2021 was really the last quarter in which people stayed at home, received their last stimulus check and bought a lot online. Investors are therefore likely bracing for dire year-over-year growth comparisons.
There have also been a few recent data points that support a slowdown in consumer spending. Video game sales posted a sharp drop of 19% in May. Although this encompasses sales of physical games and not digital games such as Sea Limited’s mobile hit Free fire, a less mainstream interest in gaming amid economic reopening may not bode well for Sea Limited. A separate analysis from market data firm Ampere Analysis predicts video game sales will fall 1.2% in 2022, the first time the industry hasn’t grown since 2015.
Gaming headwinds certainly wouldn’t be good for Sea Limited’s profitable Garena segment, home to Free fire. However, management is trying to stem the tide by recruiting Justin Bieber to perform a concert and debut a new song in the game later this year. Perhaps this will reverse his fortunes. Sea investors hope gaming earnings hold as earnings from gaming help the company embark on an aggressive, energy-intensive build of its Shopee e-commerce platform in Southeast Asia and Brazil .
A bad omen for Shopify also arrived last week as media circulated reports of layoffs, delayed job offers and the company delaying its new compensation plan. In light of its stock’s sharp decline over the past year, management was preparing to give employees more choice over whether to pay in stock or in cash. However, management recently decided to delay the implementation of this new compensation system – a potential sign that Shopify is trying to conserve cash in the short term.
Finally, not much has happened with MercadoLibre since its last earnings report, which was better than expected. Although its stock rose after the report, all of those stocks have since fallen below their first-quarter levels, due to market concerns about inflation and the potential recession. It should be noted that the MercadoPago segment of MercadoLibre has increased its loan portfolio, both to consumers and to merchants. Given a slew of macro concerns around inflation and interest rates, investors are likely a little nervous about how these loans will perform in this environment.
These three e-commerce companies are best-in-class, but their stock prices have far outpaced their business during the pandemic. However, as the tailwinds from the pandemic fade and investors have turned bearish, it is possible that they will overshoot on the downside. Therefore, investors should keep these names on their watchlists and look for signs of bottoming out.
Of the three, Sea Limited and MercadoLibre look particularly compelling, given their dominant market positions in Southeast Asia and Latin America, respectively, as well as their digital fintech franchises that create a powerful online consumer ecosystem. . Shopify is also the leader in direct-to-consumer e-commerce software, but it’s in a much more competitive arena in the US and North America. Still, Shopify’s management team has been impressive over its past decade of growth, so it should also have better days ahead of it.
Nonetheless, investors should be prepared for a tough second quarter earnings season and likely cautious outlook. While these stocks may still drop, at some point these stocks will become too cheap to ignore, despite all the headwinds. Investors should have an idea of what price they would like to pay and perhaps build a discounted cash flow model to get an idea of each company’s intrinsic value to determine when to pull the trigger.
Billy Duberstein has positions in Sea Limited and has the following options: January 2024 $50 short put options on Sea Limited, July 2022 $50 short put options on Sea Limited and $90 short call options in July 2022 on Sea Limited. Its clients may hold shares in the companies mentioned. The Motley Fool holds positions and recommends MercadoLibre, Sea Limited and Shopify. The Motley Fool recommends the following options: $1140 January 2023 Long Calls on Shopify and $1160 January 2023 Short Calls on Shopify. The Motley Fool has a disclosure policy.