What happened
Shares of e-commerce stars Shopify (SHOP 0.63%), MercadoLibre (MELI -0.48%), and Sea Limited (SE 7.35%) were each down big in early trading Monday, declining 8.2%, 6.3%, and 7%, respectively, at 12:40 PM EDT.
The technology-heavy Nasdaq Composite was also down, but these e-commerce names were down much more, likely in preparation for this week's inflation report and what could be a brutal second-quarter earnings season for e-commerce generally.
So what
June's inflation report on May's Consumer Price Index was a catalyst for the market to take another leg down last month, so it appears investors are nervous about this week's report, due out Wednesday morning. We are also getting closer to earnings season -- in which these three e-commerce companies will face a lot of headwinds.
The second quarter saw inflation spike more than expected, with oil prices and food prices high for most of the quarter until a commodity downturn late in June. That inflationary pressure could eat into these companies' cost structures while also giving customers less discretionary income to purchase goods online.
Not only that, but the second quarter will also be lapping the last quarter, before vaccines had been widely distributed to a large part of the population. That means the second quarter of 2021 was really the last quarter in which people were staying at home, receiving their last stimulus check, and shopping online a lot. So investors are likely bracing for some ugly-looking year-over-year growth comparisons.
There have also been a few recent data points that support a slowdown in consumer spending. Video game sales showed a steep 19% decline in May. Although that encompasses sales of physical games and not digital games such as Sea Limited's mobile hit Free Fire, less general interest in gaming amid the economic reopening may not bode well for Sea Limited. A separate analysis by market data firm Ampere Analysis projects video game sales will fall by 1.2% in 2022, the first time the industry hasn't grown since 2015.
The gaming headwinds certainly wouldn't be good for Sea Limited's profitable Garena segment, which is home to Free Fire. However, management is attempting to stem the tide by recruiting Justin Bieber to perform a concert and debut a new song in the game later this year. Maybe that will turn its fortunes around. Sea investors are hoping for gaming profits to hold up, as gaming profits help the company embark on its aggressive, cash-burning buildout of its Shopee e-commerce platform across Southeast Asia and Brazil.
A bad omen for Shopify also came in last week as the media circulated reports of layoffs, delayed job offers, and the company delaying its new compensation scheme. In light of its stock's big decline over the past year, management was preparing to give employees more choice in whether they are compensated in stock or cash. However, management recently decided to delay the implementation of that new pay scheme -- a potential sign that Shopify is trying to conserve cash in the near term.
Finally, not much has happened with MercadoLibre since its last earnings report, which came in better than expected. While its stock moved higher after the report, all of these stocks have since fallen below where they were in the first quarter, based on marketwide concerns over inflation and potential recession. Of note, MercadoLibre's MercadoPago segment has been increasing its loan book, both to consumers and to merchants. Given a host of macroeconomic concerns around inflation and interest rates, investors are likely a bit nervous about how those loans will perform in this environment.
Now what
All three of these e-commerce companies are best in class, but their stock prices got well ahead of their businesses during the pandemic. However, as the pandemic tailwinds recede and investors have turned bearish, it's possible they will overshoot to the downside. Therefore, investors should keep these names on their watch lists and look for signs of a bottom.
Of the three, Sea Limited and MercadoLibre seem especially compelling, given their dominant market leadership positions in Southeast Asia and Latin America, respectively, as well as their digital fintech franchises that create a powerful online consumer ecosystem. Shopify is also the leader in software for direct-to-consumer e-commerce, but it is in a much more competitive field in the U.S. and North America. Still, Shopify's management team has been impressive over its past decade of growth, so it should also have better days ahead of it.
Still, investors should be prepared for a tough second-quarter earnings season and likely conservative guidance. While these stocks could fall further, at some point, these stocks will become too cheap to ignore, in spite of all the headwinds. Investors should have an idea of the price they'd like to pay and perhaps construct a discounted cash flow model to get a sense of each company's intrinsic value to determine when to pull the trigger.
