What happened
Shares of JD.com (JD 5.80%), MercadoLibre (MELI 0.87%), and Sea Limited (SE 7.94%) all bounced strongly on Thursday -- up 10.4%, 5.7%, and 5.1%, respectively, as of 2:15 p.m. ET.
Given that Wall Street is in a quiet period before earnings season kicks off again and there was a broad synchronous move in these stocks, macroeconomic factors likely played a part. In this case, it looks as if the higher-than-expected weekly U.S. jobless claims reported Thursday may be causing investors to reassess their expectations about the pace at which the Fed will raise benchmark interest rates this year. Less aggressive hikes would benefit growth stocks. In addition, China's central bank actually cut interest rates last night, which is perhaps why JD.com rose even more than those other tech stocks.
Image source: Getty Images.
So what
On Thursday, the U.S. Labor Department released its unemployment report for last week, showing 286,000 new initial jobless claims for the period. While that is still a very low number compared to those that have been common during other periods of the pandemic, it was notably higher than the 225,000 expected by economists. The rapid spread of the omicron variant across the country, and the steep surges in new COVID-19 cases it has caused, likely played a significant role in pushing new jobless claims higher. However, it appears that the omicron surge has peaked and is receding in the Northeast, the region of the country where it first accelerated.
While the new jobless claims figure is still relatively low, the higher-than-expected number may induce the Federal Reserve to tighten its loose monetary policy at a more deliberate pace than previously expected. In recent months, high inflation data has spooked investors. Many believe the Federal Reserve is behind the curve in its efforts to stem inflation, and will have to tighten monetary conditions and raise the fed funds rate at a fast pace to compensate.
That view has hit growth stocks especially hard. Such companies often have high revenue growth but little or no profits, and because higher interest rates depress the real value of future earnings, the prospect of higher rates leads investors to discount those stocks. Today, e-commerce companies are spending heavily around the world to build out their logistics footprints in order to serve their growing markets, so they definitely fit the bill. JD.com has been the most aggressive company in China in terms of building its own logistics and delivery infrastructure, and MercadoLibre transitioned to this model several years ago after previously relying on third parties to handle those tasks. As you can see below, that has boosted its growth at the expense of its profit margin.
MELI EBIT Margin (TTM) data by YCharts
Meanwhile, Sea Limited actually uses a relatively capital-light model, but it will also build out logistics infrastructure depending on the market. However, due to its extremely aggressive global expansion strategy, it's still booking hefty net losses.
JD.com's share price rise on Thursday was likely larger than the gains of the other two e-commerce companies because China's Central bank, grappling with the fallout of its real estate sector bubble popping, has actually begun to ease monetary policy even as most other central banks around the world are looking to tighten theirs. On Thursday, the People's Bank of China cut its one-year prime loan rate from 3.8% down to 3.7%, and its five-year rate from 4.65% down to 4.6%.
Considering how far Chinese tech shares have fallen during the past year, it's perhaps little surprise that the prospect of lower interest rates there has traders picking up shares of tech and e-commerce leaders like JD.com now.
Now what
Each of these e-commerce companies is extremely well-run, with solid positions in their respective countries, and they are still trading well below the highs they set last year. While it is impossible to know if these stocks have finally hit bottom, investors may want to add these stocks to their portfolios or increase their current stakes. E-commerce is still a growth business, and emerging markets e-commerce should continue to grow as more and more people in those nations enter the middle class.
One interesting rivalry to monitor is that between MercadoLibre and Sea Limited in Latin America. Sea has been encroaching on MercadoLibre's turf in recent years, entering Brazil in 2019 and beginning to operate in other Latin American countries last year. Analysts believe that Sea's Shopee platform has already achieved a market share in Brazil in the high-single-digit percentages, and expect that its piece of the pie could grow to 20% by 2025. MercadoLibre shareholders need to be aware of this rising competitive threat, even though the Latin American e-commerce market should be big enough for multiple companies to succeed and thrive there.
