What happened
Shares of Pinterest (PINS -1.55%), Roku (ROKU -3.05%), and Etsy (ETSY -0.86%) were down hard again on Thursday, declining 9.3%, 5.6%, and 1.8%, respectively, as of 3:50 p.m. ET.
It appears it was a bad day for digital advertising stocks generally as the largest social media advertiser Meta Platforms (META -4.13%) sent an internal memo to employees cautioning of "fierce headwinds" in the second half of the year. On another down day for the markets, that likely sent Pinterest and Roku lower. Etsy fell too in spite of a positive initiation from a sell-side analyst; that's perhaps why the stock didn't fall as much. Pinterest likely fell harder due to uncertainty over its new CEO, who was introduced on Tuesday.
So what
On Thursday, an internal Meta Platforms memo was leaked to Reuters. In it, Chief Operating Officer Chris Cox said to employees,
I have to underscore that we are in serious times here and the headwinds are fierce. We need to execute flawlessly in an environment of slower growth, where teams should not expect vast influxes of new engineers and budgets.
Given that Meta is still the largest social media platform and makes 99% of its revenue from digital ads, that dour warning likely gave a read-through to the digital ad market in general, which is not good for Pinterest or Cathie Wood favorite Roku.
Additionally, both Pinterest and Roku were mentioned as part of a basket of "speculative growth stocks" that could have further to fall relative to the market, according to Goldman Sachs (GS 0.22%) analyst Christian Mueller-Glissman, who spoke with CNBC today.
Similarly, a down ad market is a reflection of a weak consumer, which would affect Etsy. Also on Thursday, the May Core Personal Consumption Expenditures Price Index, another measure of inflation that's a bit different from the Consumer Price Index (CPI), was released. While the core consumption index actually came in slightly lower than expected, at 0.3% on a monthly basis and 4.7% over the past year, it was still very high by historical standards. Meanwhile, while wages rose, disposable personal income after taxes and inflation fell 0.1% on the month and 3.3% over the past year.
Chalk this up to just another bad news day for consumer discretionary names, as consumers continue to feel the pinch from rising food and energy costs due to the war in Ukraine and higher living expenses due to the housing shortage. That doesn't leave much left over for buying items on Etsy, and if demand dries up, e-commerce companies will cut back on their ad budgets.
Still, there was one silver lining, as Raymond James (RJF 1.34%) analyst Nick Patel initiated Etsy with a "buy" rating and a $100 price target, relative to its $73 share price today. Patel believes e-commerce names have sold off too much on near-term fears. Etsy, he says, is "one of the highest-quality names in digital commerce," and today's valuation is an attractive entry point.
Now what
It's hard to know where these stocks will bottom and which will ultimately recover to make new highs. Pinterest investors are still adjusting to the recent news that Alphabet executive Bill Ready will be taking over as CEO of Pinterest, while founder Ben Silbermann will be stepping aside, although remaining as executive chairman.
Pinterest initially spiked after hours on Tuesday when the announcement was made, but the stock dropped on Wednesday, and it looks as though investors are getting nervous about all this uncertainty. My colleague Dan Caplinger is also pretty skeptical of more monetization efforts likely to come from Ready, which could hurt already-declining user engagement.
Each of these companies appears to have a compelling product and is generally well run, with the possible exception of this unique Pinterest situation. Still, there's an argument to be made these stocks were bid up far too high during the pandemic era of low rates and surging digital e-commerce, and both of those tailwinds are reversing now. While these stocks all belong on one's watchlist due to their large-scale user bases, investors need to have high conviction of each stock's future profitability in order to buy in this unforgiving market.
