The Federal Open Market Committee met Tuesday to weigh its next move on interest rates (among other things), and companies are beginning to report second-quarter results in earnest this week. As investors tried to sense which way the winds were blowing, the market's mood Tuesday was distinctively pessimistic.
As of the close of trading, the Nasdaq Composite (NASDAQINDEX: ^IXIC) was down 220 points, about 1.9%. The session's "leading losers" included Coinbase (COIN -3.97%), Affirm Holdings (AFRM 0.50%), and Roku (ROKU -2.69%), down 21.1%, 11.7%, and 7.9%, respectively. None of the three reported earnings, though Roku will do so later this week.
Coinbase: Regulatory risk is just the tip of the risk iceberg
According to various sources, crypto trading and blockchain building platform Coinbase is facing a probe by the U.S. Securities and Exchange Commission into whether it improperly allowed Americans to trade digital assets that should have been registered as securities. Coinbase Chief Legal Officer Paul Grewal posted on Twitter that "...we are confident that our rigorous diligence process -- a process the SEC has already reviewed -- keeps securities off our platform..." and linked to a company blog post from earlier this month titled, "Coinbase does not list securities. End of story."
Coinbase shares are down more than 85% from their all-time high, so Tuesday's sell-off was just pain on top of pain for many shareholders. The bigger questions investors need to ask themselves here are less about the risk of regulatory trouble and more about the future (if any) of crypto. If blockchain-based decentralized finance is truly the next big emergent technology, Coinbase is likely to be a massive long-term winner. If not, then its days are likely numbered.
Affirm: The leading edge of consumer debt risk
While Coinbase shares fell on rumors of a regulatory probe, Affirm is dealing with a market that was already worried about its prospects as recession fears intensify. An economic contraction would be particularly concerning for the buy-now-pay-later lender, which is firmly in the group of companies at the front edge of the risk curve. The bottom line is, the loans it issues are unsecured. There is no collateral that Affirm can repossess or put claims on to recover losses if borrowers default.
In addition, the company must secure capital to lend. In today's rising interest rate environment, its cost of capital is increasing, putting further pressure on its margins. Combine that with the pressure consumers are feeling on disposable income with near-double-digit inflation, and the demand for the short-term loans it offers is waning. Affirm has already lowered guidance for the current quarter, and at least one Wall Street analyst recently cut their price target for its shares as a result.
Affirm's future is less about the future of buy now, pay later, and more a product of its ability to manage costs and -- most importantly -- credit risk. So long as it can keep its charge-offs low, it should have little trouble accessing capital and earning some returns. But the next recession will be the first recession Affirm will face without massive federal stimulus to keep consumer spending afloat.
Roku: Temporary ad environment or permanently weak moats?
Just as we saw with Meta Platforms, Roku's shares are down on worries about the state of the ad market. Twitter and Snap have already reported Q2 results that showed weakness in ad demand even as their user and traffic numbers grow.
A couple of analysts think Roku is in for a rough patch. A Wolfe Research analyst downgraded it to underperform, and a Raymond James analyst recently initiated coverage at market perform. Here's the rub: The market for the programmatic digital advertising that Roku gives its ad-buying customers access to is growing. More and more people are consuming video content via streaming, and Roku's platform is a favorite for people looking to aggregate all of the streaming services they use on a single platform.
But whether Roku has any durable moats that will help it retain and grow its user base remains to be seen. The big question it must answer is whether it's attractive enough to ad buyers to continue growing through a weak economy, much less return to multiyear growth.
Opportunity or uncertainty? You be the judge
Depending on your view, there are buy -- and avoid -- cases to be made for all of these stocks. In the midst of economic uncertainty and market volatility, the trick is to find stocks that are still primed for growth and disruption, but may be misunderstood as being troubled or high risk. When it comes to these three stocks, the questions for you as an investor are: Where do you stand on crypto, consumer lending, and the future of programmatic advertising? If you're bullish on one or more of those trends, the next task is to determine whether you think these companies will be winners from those trends or not.
Of the three, Coinbase seems to offer the best risk/return prospects. The market is very down on crypto now, and Coinbase has the cash flow and balance sheet to ride out the current turbulence. Whether it's the right stock for your portfolio is up to you to decide.