Why Shopify, MercadoLibre, and Sea Limited Stocks All Slumped Before Rebounding on Wednesday

What happened

The market has already been plagued by uncertainty in 2022 and even as investors settled in for a bumpy ride, they've been on the lookout for a light at the end of the tunnel. When the latest data on inflation was released on Wednesday, it revealed the degree to which consumers were feeling the pinch, and the news wasn't good.

With that as a backdrop, shares of Shopify (SHOP 0.38%) tumbled as much as 6.5%, MercadoLibre (MELI -0.02%) slumped as much as 5.8%, and Sea Limited (SE 3.85%) slipped as much as 5.5%. As of 12:13 p.m. ET, the trio were still trading lower, down 0.1%, 0.6%, and 1.1%, respectively.

So what

A report from the U.S. Bureau of Labor Statistics detailed inflationary pressures during the month of June, and it revealed what many already suspected. The Consumer Price Index (CPI), the most widely followed measure on inflation, rose 9.1% over the preceding 12 months, notching a fresh 40-year high. 

To give this number context, it's higher than the 8.6% that prices increased year over year in May. It's also significantly worse than the 8.8% forecast issued by economists. Stripping out the highly volatile food and energy prices, the core CPI measure still climbed a gloomy 5.9%.

Driving the dismal data were record high prices at the pump last month, as the national average for a gallon of gas soared above $5. Inflation was further fueled by higher electricity and natural gas prices, which climbed 13.7% and 38.4% year over year, respectively. Energy prices overall surged 41.6% compared to the year-ago period.

As the cost of living continues to climb, consumers have a finite amount of resources. With some of the basics costing considerably more in recent months, shoppers are forced to cut back on discretionary purchases. A recent study suggests that as many as 88% of consumers have reduced spending as a way to deal with higher prices, according to data gathered by Breeze. 

In a survey conducted last month, 73% of respondents reportedly spent less on restaurants and takeout, 63% said they were buying fewer electronics and luxury goods, while 62% cut back on outings to bars, concerts, and golfing. It wasn't just discretionary spending, either. About 57% of consumers reported adjusting the budgets when buying groceries, 44% were cutting back on gas, and 35% were paying less on their credit card balances. Since consumer spending is the bedrock of the economy, things will likely get worse before they get better.

Now what

Given the record levels of inflation and consumers forced to cut back on spending, it isn't surprising that market watchers might be bearish on e-commerce stocks. Despite the obvious short-term headwinds, however, there are reasons investors should actually be buying these companies.

Digital retail has become a staple of everyday life, but in truth, it's only just getting started. E-commerce sales accounted for roughly 14% of total retail in the U.S. during the first quarter. The number of merchants joining the digital revolution continues to grow, which bodes well for Shopify, which provides entrepreneurs with all the tools they need to sell their goods and services online. 

E-commerce as a percent of total sales is even lower in Southeast Asia and Latin America, representing roughly 7% and 5% of total retail, respectively. Merely catching up with the U.S. has the potential to double or even triple digital retail in these fast-growing markets. MercadoLibre dominates the e-commerce market in Latin America, while Sea Limited's Shopee is tops in Southeast Asia, so these businesses are well-positioned to benefit from the continuing trend toward online retail. 

There are other reasons to be optimistic. Both MercadoLibre and Sea Limited offer fintech and digital payment solutions that are experiencing fast growth in their respective markets. In the first quarter, Sea Limited's digital financial services segment surged 360% year over year, while MercadoLibre's fintech revenue soared 113%. This suggests that these companies' growth prospects aren't limited to e-commerce.

Finally, each of these stocks sits at or near all-time low valuations on a forward price-to-sales basis. Shopify, MercadoLibre, and Sea Limited are currently trading at 7, 4, and 3 times forward sales, putting them in bargain basement territory for investors with a long-term outlook. 

After digesting their initial misgivings about the rate of inflation, investors began to tiptoe back into e-commerce stocks, helping them rebound from this morning's drubbing.