What happened
While the Nasdaq was down mildly today, former pandemic-era highfliers Roku (ROKU -10.29%), DraftKings (DKNG 4.96%), and Beyond Meat (BYND 0.95%) were all down significantly, falling 7.6%, 8.4%, and 7.6%, respectively, as of 1:45 p.m. ET.
There wasn't much in the way of company-specific news today, but investors appear to be turning cautious once again on high-growth, profitless stocks that benefited in the early days of the pandemic. A key inflation report is also due out on Wednesday, and second-quarter earnings season will soon commence. Most indicators point to an adverse environment for consumer-oriented stocks like these. Meanwhile, the Fed will likely continue to raise rates this month, which could be a headwind for growth stock valuations.
So what
While these stocks had already been hammered to start 2022, each actually has had a nice rally since mid-June. That's when the Federal Reserve decided to hike the federal funds rate by 75 basis points in order to stamp out inflation. However, that prompted a drop in long-term interest rates such as the 10-year Treasury yield, as well as commodity prices toward the end of the month.
Lower long-term yields and falling commodity inflation gave a reprieve to these stocks from mid-June until today, with Roku up 20%, DraftKings up 20%, and Beyond Meat up a whopping 44% off their recent lows in a short amount of time -- and these numbers even incorporate today's drop. However, given that investors are now about to hear second-quarter earnings results and commentary on the second-half outlook, it appears traders are taking near-term profits.
Investors have good reasons to be nervous. Back in May, social media stock Snap (SNAP 27.63%) pre-announced an abrupt drop-off in online ad revenue. A slowdown in digital advertising would certainly hurt Roku, which gets the majority of its revenue and profit from digital ad sales over its platform.
Meanwhile, various June surveys of consumer sentiment, including from the University of Michigan and The Conference Board, appeared to show deteriorating consumer confidence despite low unemployment. With a greater portion of consumer paychecks going toward food and fuel, that leaves less money leftover to spend on discretionary items, such as online gambling. Despite outperforming in the first quarter and raising guidance, DraftKings still projects an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) loss between $760 million and $840 million this year. It's unclear how investors will take that as short-term interest rates go over 2%.
Finally, Beyond Meat's recent results have been nothing short of disastrous. While the company exhibited rapid growth in the early days of the pandemic, fueling hopes its plant-based meat would disrupt the traditional global meat market, growth has ground to a halt in recent quarters. In response, management has cut prices, even though the company is still spending heavily on growth projects and burning cash. Beyond Meat may run into a financing problem if its profitability doesn't turn around, as it burned about $187 million in cash last quarter alone, with only about $550 million remaining on the balance sheet as of March 31. As interest rates go up and with the stock down 77% over the past 12 months, Beyond Meat is not in a great position to raise more money right now. No wonder some investors are taking their chips off the table before it reports Q2 numbers.
Now what
Connected TV, recently legal online gambling, and plant-based meat are all exciting growth industries that were actually helped by pandemic-era trends. However, investors need to remember that exciting growth industries attract a lot of competition, and hubris can lead to overinvestment. When the economy slows down or trends reverse, even for a short period, a slowdown in growth can be devastating for stocks like these that have been largely valued on their revenue growth. And it can be especially bad for growth companies that lose money, with the potential need to raise more cash in the near future.
Although these stocks seemed like they were bottoming over the past month after devastating declines, I'd still remain cautious on them, especially the loss-making DraftKings and Beyond Meat.
