What happened
Shares of Block (SQ 1.68%), MercadoLibre (MELI 0.87%), and DoorDash (DASH 0.07%) were plunging again today, down 5.6%, 4.5%, and 7.5% respectively, as of 1 p.m. ET.
There wasn't any company-specific news today, but consumer- and small-business-facing apps continued to correct in a difficult environment. Today at 2 p.m., the minutes of the latest Federal Reserve meeting will be released, along with commentary from Chair Jay Powell.
Many suspect the Fed will hike interest rates by 50 basis points, but the fear is that there will be even more hawkish talk on inflation and the path of future rate hikes this year. That could affect the discount rate investors apply to future earnings, which would hurt the intrinsic value of growth stocks such as these three. In addition, hiking rates too much could throw the economy into a downturn, which would affect consumer-facing services such as these as well.
Also, all three companies report earnings tomorrow, May 5. Therefore, some may be taking some money off the table ahead of their first-quarter releases.
So what
All three of these companies play to the digital consumer. Since their revenues took off during the stay-at-home economy of the pandemic, each is coming off very hot growth numbers, which are now likely to decelerate as vaccines proliferate and COVID-19 mutates into a less severe disease.
Not only is revenue likely to decelerate, but each company has really focused on growth over profits during the stay-at-home boom. Now, however, it appears investors will be looking more carefully at a company's bottom line as rates rise. While Block is down more than 75% from its highs, it still trades at 88 times this year's earnings estimates. While its 47% gross profit growth last quarter has remained solid, one wonders if the company can keep that up, as its Cash App tends to appeal to younger millennials and Gen Z, and its payments processing business is aimed at small businesses. How will these customers hold up in a slowing economy?
MercadoLibre has lost half its value from its highs, but still trades at 135 times this year's earnings estimates. This is of course largely because MercadoLibre has been building out an impressive logistics infrastructure in Latin America, which has hurt its once-high profit margins, but should also widen its moat against rivals. Still, MercadoLibre operates in economies with even higher inflation than the U.S., and the strengthening dollar against those currencies could hurt the value of MercadoLibre's earnings, which is mostly earned in Latin American currencies.
Meanwhile, DoorDash is down more than 70% from its highs, as profitability remains elusive. While DoorDash is growing nicely and still has positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), net earnings remain negative. While DoorDash is executing rather well and scaling, it's still unclear how much profit the platform will ultimately make. Meanwhile, gross order volume has decelerated from 227% growth during the fourth quarter of 2020 during the last phases of the pandemic, to just 35% growth in the fourth quarter 2021. It's actually kind of impressive DoorDash can still grow that much on such difficult comparisons, but it also appears to be a low-margin business, at least for now.
Image source: Getty Images.
Now what
It could be a volatile couple of days for these three names. Each is likely to be strongly affected by what Powell says today, either to the upside or the downside. Then tomorrow, each of these companies reports first-quarter earnings.
Block is projected to make $4.14 billion in revenue and non-GAAP (adjusted) EPS of $0.21. MercadoLibre is projected to grow revenue 77% to $2.02 billion, with EPS of $1.35. DoorDash is projected to grow revenue 27.8% to $1.38 billion, with negative EPS of $0.41.
Investors should prepare for volatility; however, if you are a believer in the long-term future of these well-run companies, today's harsh market environment could present long-term buying opportunities. Just make sure you are paying a fair price relative to your own long-term profit expectations.
