What happened
After days of declines, a large number of e-commerce and technology stocks staged a wide-ranging relief rally on Tuesday. Investors focused on a broader range of economic issues, allowing high-growth stocks to stage a comeback.
Shares of Amazon (AMZN 0.91%) gained as much as 3%, Sea Limited (SE 2.18%) climbed as much as 8.8%, and MercadoLibre (MELI +0.77%) surged as much as 10.9%. The trio were trading higher, up 2.3%, 6.4%, and 10.5%, respectively, as of 1:59 p.m. ET.
Image source: Getty Images.
So what
There wasn't any company-specific news driving these gains, but rather a more upbeat attitude on Wall Street that seemed to be pushing many beaten-down stocks higher.
E-commerce platforms have taken it on the chin recently, as investors bet that massive gains resulting from the pandemic would eventually fade. Adding insult to injury, all three major market indexes have slumped so far this year, dragging technology and online shopping stocks further into the red. Fears regarding the surge in inflation and the ongoing spread of the omicron variant of COVID-19 have helped drive the major market indexes down since late December.
However, positive sentiment seemed to prevail Tuesday as investors considered a number of factors that seemed to boost their morale.
Given the recent spike in inflation, the Federal Reserve has signaled its willingness to hike interest rates as many as three times in 2022 to rein in overheating price growth. Some market watchers are now predicting that the Fed could hike rates as many as four times to keep inflation in check.
Federal Reserve Chair Jerome Powell is testifying before a Senate committee this week, after being nominated to an additional term by President Joe Biden. Wall Street likes stability, and having consistency at the central bank could help provide that.
Additionally, bond yields pulled back after recent increases. Rising yields typically indicate investors are nervous about increasing inflation and are looking for a safe haven to stash their cash. Falling yields usually accompany investors getting back into the stock market.
Image source: Getty Images.
Now what
It's important to remember that while broader economic forces can impact the market over the short term, revenue and earnings growth will eventually determine the success or failure of a business -- and stock prices will react accordingly.
After being cooped up for months on end, consumers have recently taken advantage of summer vacations and the loosening of pandemic-related restrictions to get out and enjoy life. This has had an adverse, albeit temporary, impact on online retail, but not all e-commerce companies were affected equally.
Amazon's revenue growth has slowed so far this year, increasing 15% year over year in the third quarter. It's worth noting the company faced tough comps in light of its blockbuster results last year, when full-year revenue jumped 38%, its highest growth rate in years -- so the deceleration wasn't entirely unexpected.
After putting up triple-digit revenue growth for five successive quarters, MercadoLibre's growth also slowed, growing 73% year over year in the third quarter, while net income soared more than sixfold. This was driven by e-commerce revenue that grew 74% and fintech revenue that climbed 71%. The company also achieved new records in gross merchandise volume and total payment volume, helping illustrate the resilience of its business.
Sea Limited, on the other hand, bucked the trend, with its revenue growth accelerating compared to the year-ago period, up 122%. This marks the fourth consecutive quarter of year-over-year growth in excess of 100%. The company continues to forego profit in order to expand its market, but its positive free cash illustrates that much of those expenditures are related to non-cash items like depreciation, which helps put its bottom line in perspective. Sea Limited's triple threat of e-commerce, gaming, and payments puts it in the sweet spot of three profitable trends that will fuel growth for years to come.
Given the continuing growth and vast opportunities that remain for this trio of e-commerce providers, investors would be best served by focusing on these company-specific factors, rather than the ebbs and flows of the broader market.
