What happened
Shares of MercadoLibre (MELI -0.45%), Coupang (CPNG 1.01%), and DoorDash (DASH 1.06%) all fell hard this week, with these stocks down 14.2%, 12.7%, and 7.8%, respectively, through the end of trading on Thursday.
There wasn't any significant company-specific news for any of these three names, yet their stocks saw intense selling pressure as high-growth but low- or no-profit tech companies continued to struggle. Ironically, this week's positive news on omicron and U.S. payrolls was likely a negative for these stocks, which cater to the stay-at-home economy.
Image source: Getty Images.
So what
Earlier this week, U.S. Food and Drug Administration (FDA) commissioner Dr. Scott Gottlieb made several media appearances in which he gave good news on omicron. Not only do data show it may cause less severe disease, but it's also moving so fast through the population that the U.S. may be through this surge by February. That's obviously great news for the world, but it could be a headwind to the aforementioned e-commerce leaders.
Then on Wednesday, the December private payroll number came in stronger than expected, rising 807,000 -- much higher than the 400,000 estimate.
Sounds good, right? Well, a faster reopening and higher economic growth have come with inflation, at least in recent months. With inflation numbers coming in higher than expected as the world unevenly emerges from the pandemic, the Federal Reserve is thinking of tightening monetary policy more quickly. On Wednesday, the Fed released minutes from its December meeting, indicating not only that it would taper its bond purchases and likely raise rates this year, but that officials are now talking about shrinking the Fed's balance sheet.
If that happens, it would tighten financial conditions even further, which could hurt the intrinsic value calculations for high-growth stocks with profits far out in the future. Both DoorDash and Coupang, while growing revenue quickly, are still losing a lot of money on the bottom line as they invest in growth and fend off competition. And while MercadoLibre is technically profitable, it still trades at 130 times next year's earnings estimates as it invests heavily in its own logistics footprint.
Basically, there's no sign profitability is coming to these companies anytime soon, so when you have higher discount rates, combined with potential revenue deceleration as people venture out of their homes more, that's a lethal combination.
Furthermore, strong U.S. economic growth relative to the rest of the world caused the dollar index to rise this week. A stronger dollar means foreign companies will need to earn more in their local currencies to keep their financials equivalent in U.S. dollars. That could be why the international companies MercadoLibre and Coupang were down more than DoorDash.
MELI Percent Off All-Time High data by YCharts
Now what
After this week's bloodbath, are these long-term winners buys right now? Over the very long term, I like each of these companies' competitive positions and management teams.
However, despite their fall, none of these stocks look obviously "cheap." That's especially true when we really don't know what their profit margins will be in a more mature state, and we also don't know how quickly or how high interest rates will rise. If you're investing in these names, you need to try to pencil those assumptions out.
Still, for young investors, these stocks are down so much from all-time highs -- 39%, 62%, and 47%, respectively -- that they may be worth a look for starting a position. Yet considerable risks remain during this period of reopening and interest rate normalization, so only invest in appropriate allocations for your risk tolerance, because there could be more downside ahead.
